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Will McCormick's (MKC) Q4 Earnings Gain From Acquisitions?

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McCormick & Company Inc. (MKC - Free Report) is slated to report fourth-quarter fiscal 2017 results on Jan 25, before the opening bell. The bottom-line results of this leading distributor of spices, seasonings and other specialty food products outpaced the Zacks Consensus Estimates in three out of the preceding four quarters, with an average beat of 4%.

Considering this, let’s delve into how things are shaping up for the upcoming announcement.

What to Expect?

The Zacks Consensus Estimate for the fourth quarter and fiscal 2017 has been stable over the past 30 days at $1.52 and $4.22, respectively. Expected earnings for the quarter under review and the fiscal 2017 depict a growth of 19.7% and 11.6%, respectively, from the year-ago reported figure. Notably, management expects fiscal 2017 adjusted earnings in the range of $4.20-$4.24 per share.

Further, analysts polled by Zacks expect net sales of $1,475 million for the fourth quarter, up 20.2% from sales recorded in the year-ago quarter. Also, the consensus mark for fiscal 2017 sales is pegged at $4.82 billion, reflecting a rise of 9.3% from fiscal 2016 sales.

McCormick & Company, Incorporated Price, Consensus and EPS Surprise

Factors at Play

Acquisitions have long been favoring McCormick’s performance, aiding the company to develop a robust product portfolio. 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 led to sales growth in the industrial and consumer business segments of the company during the third quarter of fiscal 2017. In fact, the acquisitions of Reckitt Benckiser and Enrico Giotti SpA contributed to sales growth in the third quarter. Further, the company continues to expect positive synergies from the acquisition of Reckitt Benckiser Group.

Driven by such factors, the Zacks Consensus Estimate for sales growth for the fourth quarter related to consumer and industrial business segments are currently pegged at 0.18% and 0.25%, respectively.

Moreover, the company raised its guidance for fiscal 2017 to reflect the positive impacts from the acquisition of Reckitt Benckiser Group and lower currency. The company expects sales to grow approximately 9-10% in fiscal 2017, compared with the previous range of 4-6%. Excluding currency, McCormick expects sales to grow approximately 10-11% in fiscal 2017, compared with the previous band of 5-7%.

McCormick’s cost-saving and productivity-enhancing initiatives through the Comprehensive Continuous Improvement (CCI) program have also been positively impacting performance. Owing to the cost-savings efforts, the company delivered double-digit adjusted operating income growth in the third quarter and expanded adjusted operating income margin by 140 basis points. This marks the seventh consecutive quarter of margin expansion. McCormick expects to deliver cost savings of at least $105 million in fiscal 2017, up from the previous expectation at least $100 million expected previously.

Although the company has been progressing well with savings and business expansion plans, higher input costs have been hurting McCormick’s margins of late. Prices of majority of the raw materials including cinnamon, oregano and rice along with packaging costs have been rising for a while. Further, in fiscal 2017, the company expects material cost inflation in mid-single digits. McCormick’s increased spending on brand marketing also poses adequate threats of lowering profits. However, we expect the company to offset the impact of such hurdles through efficient pricing strategies.

What Does the Zacks Model Unveil?

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, its Earnings ESP of -0.49% makes surprise prediction difficult. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks With Favorable Combinations

Here are some companies which, per 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 +0.51% and a Zacks Rank #2.

United Natural Foods, Inc. (UNFI - Free Report) has an Earnings ESP of +4.32% and a Zacks Rank #2.

Church & Dwight Company, Inc. (CHD - Free Report) has an Earnings ESP of +0.30% and a Zacks Rank #2.

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