Back to top

Image: Bigstock

Can Buyouts & Cost Savings Aid McCormick's (MKC) Q1 Earnings?

Read MoreHide Full Article

McCormick & Company Inc. (MKC - Free Report) is slated to report first-quarter fiscal 2018 results on Mar 27, before the opening bell. We note that the company’s bottom-line results outpaced the Zacks Consensus Estimates in the preceding four quarters, with an average surprise of 4.3%. Incidentally, the company’s well-chalked buyouts, product innovations and efficiency enhancing initiatives have been yielding well.

With these in mind, let’s delve into how things are shaping up for the upcoming announcement and see if his leading distributor of spices, seasonings and other specialty food products can maintain its positive earnings surprise streak.

Expansion Efforts Aid Consumer & Industrial Businesses

Acquisitions have long been favoring McCormick’s performance, aiding the company to develop a robust product portfolio and strengthen its base business. To this end, McCormick’s buyout of the food division of Reckitt Benckiser Group plc in August 2017 deserves special mention. Apart from adding iconic brands to McCormick’s portfolio, the deal has been aiding sales growth in the company’s industrial and consumer business segments for a while.

Looking back, the company’s past acquisitions have played a significant role in bolstering its performance. Some of the noteworthy buyouts of the company include Italy-based Enrico Giotti SpA (Dec 2016) and Australia-based Botanical Food Company (April 2016). Markedly, additional sales from buyouts of RB Foods, Giotti and Gourmet Garden contributed 6% to the company’s constant currency sales growth in fiscal 2017. Also, management expects additional sales from RB Foods to contribute 8% to fiscal 2018 sales growth.

Apart from acquisitions, McCormick regularly undertakes innovations to add new products to its portfolio, stay competitive and tap the evolving demand for new flavors, spices and herbs.  Notably, the company’s innovation agenda is primarily based on the health and wellness of consumers at large. The company is planning to offer innovative flavors in breakfast platform and ready-to-serve gravies. McCormick is also shaping up portfolio with gluten-free, non-GMO and organic products to cater to the evolving needs of consumers. In 2016, the company renovated its core products with non-GMO labeling on everyday spices and seasonings.

Such constant growth endeavors have indeed aided in radically expanding and bolstering the company’s consumer and industrial business segments. To top it, the Zacks Consensus Estimate for net sales related to consumer and industrial business segments for the first quarter i currently pegged at $762 and $480 million, respectively. The consensus mark depicts a growth of approximately 19.2% and 18.5% from the prior-year reported figures.

Enhancing Savings Via the CCI Program

McCormick focuses on saving costs and enhancing productivity through its ongoing Comprehensive Continuous Improvement (CCI) program. The program has enabled the company to increase investments, which has been leading to higher sales and profits. Notably, cost savings through CCI and streamlining actions reached $117 million in fiscal 2017, up from $109 million in fiscal 2016. McCormick is on track with its four-year targeted savings of around $400 million by November 2019.

Notably, cost savings from CCI helped the company deliver double-digit adjusted operating income growth in fourth-quarter fiscal 2017. The adjusted operating margin expanded 220 basis points (bps), marking the eighth consecutive quarter of margin improvement. Further, gross margin increased 180 bps in the fourth quarter and is likely to expand in the range of 150-20 bps in fiscal 2018. The company projects adjusted operating income growth in the range of 23-25% in fiscal 2018, with plans to achieve cost savings of $100 million.  

Hurdles Yet to Be Crossed

Although the company has been progressing well with savings and business expansion plans, higher input costs have been hurting McCormick’s performance of late. In fact, higher raw material costs, along with increased brand marketing and freight expenses also affected the company’s performance in the fourth quarter. In fiscal 2018, the company expects material costs to escalate in low-single digits. Nevertheless, we expect these downsides to adequately be cushioned by the company’s CCI program and efficient pricing strategies.

McCormick & Company, Incorporated Price, Consensus and EPS Surprise

What Picture Do Estimates Provide?
    
The Zacks Consensus Estimate for the first quarter has been stable over the past thirty days at 91 cents. Expected earnings for the quarter under review depicts a rise of 19.7%, from the prior-year reported figures.

Further, analysts polled by Zacks expect net sales of $1,235 million for the first quarter, reflecting an improvement of 18.3% from the year-ago period sales figure.

A Look at the Zacks Model

Our proven model does not conclusively show that McCormick is likely to beat earnings estimates this quarter. This is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although McCormick carries a Zacks Rank #3 (Hold), its ESP of 0.00% makes surprise prediction difficult.  You can see the complete list of today’s Zacks #1 Rank stocks here.

Other Stocks With Favorable Combinations

Here are some companies which, according to our model, have the right combination of elements to deliver earnings beat.

The Estee Lauder Companies Inc. (EL - Free Report) has an Earnings ESP of +2.61% and a Zacks Rank #2.

Kimberly-Clark Corporation (KMB - Free Report) has an Earnings ESP of +0.76% and a Zacks Rank #2.

The J. M. Smucker Company (SJM - Free Report) has an Earnings ESP of +0.52% and a Zacks Rank #2.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.   

See the pot trades we're targeting>>

Published in