Will Escalated Costs Continue To Hurt McCormick In 2018?

McCormick & Company Inc. (NYSE:MKC) has been bearing the brunt of higher raw material costs and elevated marketing spends. Unfortunately, these hurdles have caused this Zacks Rank #4 (Sell) company to underperform the industry in the past three months. Incidentally, shares of McCormick dipped 0.5% against the industry’s rally of 6.2%.

McCormick Battles Higher Input Costs & Market Spend

McCormick’s operations are vulnerable to raw material price fluctuations. Higher raw material costs, particularly vanilla and garlic, have been hurting McCormick’s margins. Prices of raw materials including cinnamon, oregano and rice as well as packaging costs have also been increasing since fiscal 2012. Moreover, for 2017, the company expects material cost inflation to be in mid-single digits.

Fluctuations in input materials are mainly attributable to changes in weather and market demand conditions. Additionally, pricing actions undertaken by the government affects the cost of raw materials.

McCormick has been resorting to higher promotional and marketing expenditures to boost its top line. Though the company’s higher spending on marketing will drive brands’ growth, it will also raise the company’s expense structure. Further, the company expects brand marketing to increase at a high single-digit rate in 2017 compared with the previously estimated mid to high single-digit rate.

While such expense related headwinds were more than offset by higher sales and strong brand performances during the third quarter of 2017, their negative impacts are expected to linger in the forthcoming periods and dent results.

Actions to Mitigate Headwinds

McCormick strives to offset price hike through strategic raw material purchases. Further, well-planned pricing actions are expected to aid the company mitigate the negative impacts stemming from increased marketing and raw material costs. Moreover, the company’s constant endeavors to expand business trough acquisitions are expected to continue boosting the top line and offset the aforementioned hurdles.

Nervous About McCormick? Check These Stocks Instead

Investors interested in the same sector may consider stocks such as Estee Lauder Companies Inc (NYSE:EL) , United Natural Foods Inc. (NASDAQ:UNFI) and Meredith Corporation (NYSE:MDP) . While Estee Lauder flaunts a Zacks Rank #1 (Strong Buy), United Natural Foods and Meredith Corporation carry Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Estee Lauder came up with an average positive earnings surprise of 18% in the trailing four quarters. It has a long-term earnings growth rate of 12.5%.

United Natural Foods pulled off an average positive earnings surprise of 2.3% in the trailing four quarters. Also, it has a long-term earnings growth rate of 5.8%.

Meredith Corporation delivered an average positive earnings surprise of 7.1% in the trailing four quarters. It has a long-term earnings growth rate of 8%.

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