Will McCormick's (MKC) Buyout Gains Offset The Cost Woes?

McCormick & Company, Inc.’s (NYSE:MKC) strategic growth efforts which include acquisitions and innovation have been boosting its portfolio. Moreover, its cost saving initiatives has significantly aided improving profitability. Nevertheless, raw material cost inflation and weak sales in the U.K region have raised concerns for sustaining the company’s performance.

Let’s now delve deeper into some of the factors that have been aiding the company’s performance and hindering its growth.

Acquisitions & Innovations Aiding Growth

McCormick has been strategically increasing its presence through acquisitions in order to grow its spices and seasonings portfolio. It recently completed the acquisition of the food division of Reckitt Benckiser Group plc, a British consumer products company. The acquisition is expected to significantly boost the company’s robust spices portfolio with iconic brands like Frank's RedHot and French's Mustard that hold top positions in their respective categories in the United States and Canada. The buyout will position McCormick as one of the leading companies in the U.S. condiments category. In the past, the company has made several acquisitions including Italy-based Enrico Giotti SpA and Australia-based Botanical Food Company (both carried out in 2016). The buyouts have aided the company to expand its distribution network and increase brand investment.

McCormick has also been investing in innovation in order to develop healthy food products as consumers turn toward fresh food items. In this respect, the company has been partnering with government and trade agencies. It is also shaping up its portfolio with gluten free, non-GMO and organic products to satisfy the evolving needs of consumers.

Cost Saving Initiatives

The company’s dedicated focus toward cost savings is quite evident from the Comprehensive Continuous Improvement (CCI) program. Cost savings through CCI and streamlining actions reached $109 million in 2016, up from $98 million in 2015. Further, it expects to deliver cost savings of at least $100 million in fiscal 2017 and savings of around $400 million by Nov 30, 2019. McCormick uses its CCI savings to increase investments and productivity, thereby leading to higher sales and profits.

Headwinds Posing concerns

McCormick has been suffering from higher input costs since past many quarters. Prices of raw materials such as vanilla, garlic, cinnamon, oregano and rice, as well as packaging costs have been steadily increasing, and thereby affecting McCormick’s margins. For fiscal 2017, the company expects material cost inflation in mid-single digits. Further, the company’s sales in Europe, Middle East and Africa (EMEA) have remained sluggish of late due to difficult economic, political and competitive factors. Moreover, its business in the U.K has been sluggish as large retailers reduce shelf space for food products to gain space for general merchandise.

Owing to such headwinds, the company’s shares have underperformed the broader Consumer Staples sector in the past six months. Shares of the company have declined 3.8% in comparison to the sectors gain of 2.4%.

Bottom-Line

We believe that this Zacks Rank #3 (Hold) stock has the potential to offset these headwinds. The company’s higher brand marketing, increased pricing, new products, expanded distribution and acquisitions are expected to contribute to the growth, in the forth coming periods. Further, the company anticipates pricing actions to offset an anticipated mid-single digit increase in material costs. The company also expects lower currency impact on fiscal 2017 sales. Moreover in an effort to improve EMEA regions dismal performance, the company had resorted to undertaking streamlining actions during the second quarter of fiscal 2017.

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Constellation Brands delivered an average positive earnings surprise of 11.7% in the trailing four quarters. It has a long-term earnings growth rate of 18.2%.

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Ingredion Incorporated delivered an average positive earnings surprise of 5.1% in the trailing four quarters. It has a long-term earnings growth rate of 11%.

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