McCormick (MKC) Up 1.1% Since Earnings Report: Can It Continue?

A month has gone by since the last earnings report for McCormick & Company, Incorporated (NYSE:MKC) . Shares have added about 1.1% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to its next earnings release, or is MKC due for a pullback? Before we dive into how investors and analysts have reacted 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 Tops Q4 Earnings Estimates, Issues '18 View

McCormick posted solid fourth-quarter fiscal 2017 results, with earnings and revenues outpacing the Zacks Consensus Estimate and improving year over year.

Adjusted earnings of $1.54 per share beat the Zacks Consensus Estimate of $1.52. Adjusted earnings were also 21.3% higher year over year owing to increased gross profit and operating income. Further, the bottom-line results were aided by higher sales and cost savings.

Revenues and Profits

In the quarter under review, the global leader in flavors and spices generated revenues of approximately $1,491 million, exceeding the Zacks Consensus Estimate of $1,476 million. Revenues grew about 21.5% from the prior-year quarter, including a favorable 1% impact from currency. Encouragingly, the acquisitions of Reckitt Benckiser Group (RB Foods) and Enrico Giotti SpA drove sales by 15%. On a constant currency basis, sales grew 20%.

Top-line results were also buoyed by strong growth in the base business and new product additions. Revenues also benefitted from strong marketing initiatives, augmented distribution network and efficient pricing actions for offsetting material cost inflation. Sales growth in the quarter was broad-based, with improvement in the consumer and industrial segments.

Gross profits in the fourth quarter went up 23.7% to $668.2 million. Gross margin expanded 80 basis points (bps) from the prior-year figure, primarily gaining from the company’s shift to more value-added products and savings from the CCI program. The positives were partially offset by transaction expenses stemming from the RB Foods acquisition. Adjusted gross profit in the quarter rose 26.4% to $683.2 million, while adjusted gross margin increased 180 bps from the year-ago figure.

Adjusted operating income grew 36.4% to $307.4 million in the quarter under review. On a constant currency basis, operating income increased 36%.

Segment Details

Consumer Business: Revenues grew 19.9% to $978.3 million. On a constant currency basis, sales improved 18%, primarily driven by growth in the Americas, EMEA and the Asia/Pacific regions.

Solid performance in the Americas was driven by the acquisition of RB Foods as well as strong pricing, new products and expanded distribution. Sales in the EMEA region gained from the RB Foods buyout as well as efficient pricing and higher sales volumes of the branded products. Further, sales in the Asia/Pacific region were driven by growth in India and China.

Operating income grew 28% at constant currency, buoyed by sales growth and cost savings, which more than offset the impact of higher material costs and brand marketing expenses.

Industrial Business: Sales grew 24.6% from the prior-year quarter to $512.6 million. On a constant currency basis, sales increased 23% on improved performance across all three regions.

Meanwhile, sales in the Americas were led by higher sales of seasonings, savory flavored products and continued growth momentum in branded foodservice. Incremental sales from RB Foods were also witnessed in the region.

Sales in the EMEA region were mainly driven by the Giotti acquisition. Additionally, sales to both quick-service restaurants and packaged food companies increased in the quarter. Industrial sales in the Asia/Pacific region rose on strong results in China, stemming from product launches and promotional activities at quick-service restaurants.

Operating income rose 70% year over year, driven by favorable impact of higher sales, product mix and savings initiatives, which more than offset the unfavorable impact of higher material costs. The segment witnessed a minimal impact from currency in the quarter.

Financial Update

McCormick exited the quarter with cash and cash equivalent of $186.8 million, long-term debt of $4.4 billion and shareholders’ equity of $2.6 billion.

During fiscal 2017, net cash flow from operations was $815 million, up almost 24% from the prior year on solid improvement in working capital.

We note that the company had announced an 11% hike in quarterly dividend last November.

Fiscal 2018 Guidance

The company expects sales to grow approximately 12-14% in fiscal 2018, mainly driven by improved business performance stemming from acquisitions. Brand marketing efforts and product launches are expected to aid sales. Additionally, the company expects low-single digit increase in material costs. These are anticipated to be offset by efficient pricing action.

Earnings for fiscal 2018 are expected in the range of $4.80 to $4.90, reflecting 13-15% growth year over year. This includes an expected positive impact of nearly one percentage point from currency fluctuations. Estimated earnings take into consideration the reduction in effective tax rates in accordance with the recent U.S. tax policies. The company also expects currency to drive the company’s performance throughout the year.

The company projects adjusted operating income growth in the range of 23% to 25%, taking a 1% favorable impact of currency into consideration. The company also plans to achieve cost savings of $100 million. Additionally, McCormick plans to continue focusing on brand marketing, pricing actions, product launches and expansion of distribution channels in order to maintain business growth momentum.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter.

McCormick & Company, Incorporated Price and Consensus

McCormick & Company, Incorporated Price and Consensus | McCormick & Company, Incorporated Quote

VGM Scores

At this time, MKC has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is more suitable for growth investors than momentum investors based on our style scores.

Outlook

Estimates have been trending upward for the stock and the magnitude of this revision also looks promising. It comes with little surprise that MKC has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.