Why Is McCormick (MKC) Up 9.2% Since Last Earnings Report?

A month has gone by since the last earnings report for McCormick (MKC). Shares have added about 9.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is McCormick due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

McCormick's Q4 Earnings Lag Estimates, Sales Up Y/Y

McCormick & Company (NYSE:MKC) posted fourth-quarter fiscal 2018 results, wherein adjusted earnings of $1.67 per share improved 8.4% on a year-over-year basis. Adjusted earnings were driven by favorable impacts of adjusted income tax rate, owing to reduced U.S. federal tax rate and discrete items. However, foreign currency rates had an unfavorable impact on the bottom-line performance. Further, we note that bottom-line missed the consensus mark of $1.70.

Revenues & Profits

In the quarter under review, McCormick, the global leader in flavors and spices, generated sales of $ 1,499.2 million. The top line inched up 0.6% from the prior-year quarter’s figure, including a 1% negative impact from currency. Despite the adverse impacts of trade inventory reductions in the Americas, sales gained from new products, advancement in the base business, augmented distribution and pricing actions. Further, the company’s consumer and flavor solutions units continued to be sturdy. On a constant-currency (cc) basis, the top line improved 2%. However, reported sales fell short of the Zacks Consensus Estimate of $1,550 million.

Gross profits in the fourth quarter rose nearly 2% to $681.5 million. Gross margin came at 45.5%, expanding 70 basis points (bps) from the prior-year quarter’s figure. However, on an adjusted basis, gross margin declined 30 bps, thanks to unfavorable impacts of product mix and partially countered by savings from the CCI program

Adjusted operating income declined almost 3.2% to $297.7 million due to unfavorable product mix, higher investments and increased distribution expenses. The decline includes a 1% adverse impact from currency. Further, adjusted operating income margin came in at 19.9%, depicting contraction of 70 bps.

Segment Details

Consumer Business: Sales inched up almost 0.6% to $984.4 million. At cc, sales improved 2% on improvements across all regions.

Sales in the Americas were flat, while it rose 1% on cc basis. This was mainly driven by pricing actions, volume growth from new products, augmented marketing and distribution support. Sales in the Asia/Pacific region grew 4%, while it improved 10% on cc basis driven by broad based volume improvements in China. In the EMEA region, sales remained flat, while it rose 3% in cc owing to broad based volume and productivity improvements.

Flavor Solutions: Sales in the segment rose 0.4% from the prior-year quarter’s tally to $514.8 million. At cc, sales increased 3% on improved performance in all regions.

Sales in the Americas grew 1% (up 2% at cc) driven by improved sales to quick service restaurants and increased sales of flavors and seasonings. Sales in the EMEA region decreased 2%, while it improved 5% at cc driven by pricing and favorable impacts from a major customer’s sales. Sales in the Asia/Pacific region declined 1%, while it rose 3% at cc owing to quick service restaurants sales.

Financial Update

McCormick exited the quarter with cash and cash equivalents of $96.6 million, long-term debt of $4,052.9 million and shareholders’ equity of $3,182.2 million.

For fiscal 2018, net cash provided by operating activities were $821.2 million, up 0.7% from $815.3 million in the prior-year quarter. The rise stemmed from net income growth.

Fiscal 2019 Guidance

Management expects continued rise in global demand for flavors and fresh food offerings. With strong growth strategies in place, the company expects to successfully meet consumers rising demand. Toward this end, the company is striving to utilize resources more efficiently as well as reduce costs to drive savings.

That said, management provided projections for fiscal 2019. The company expects sales to grow in the range of 1-3% (up 3-5% at cc). The company expects to achieve top-line growth completely on an organic basis, as it anticipates no benefits from acquisitions. That said, sales are likely to be driven by efforts like new product launches and expanded distribution and marketing. Further the company intends to achieve cost savings of almost $110 million in fiscal 2019, which will be utilized for growth-oriented investments and for offsetting high costs.

Adjusted earnings for fiscal 2019 are projected in the range of $5.17-$5.27, reflecting year-on-year rise of 4-6%. The bottom line is expected to grow 6-8% at cc. Also, the company anticipates strong cash flow for 2019.

Further, the company expects adverse currency impacts of nearly 2 percentage points on net sales, adjusted operating income as well as adjusted earnings per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, McCormick has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, McCormick has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.