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McCormick Stays Neutral

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We reaffirm our Neutral recommendation on McCormick & Co, Inc (MKC - Free Report) following mixed results in the second quarter of fiscal 2013.

Why the Reiteration?

McCormick reported its second quarter results on Jun 27. Earnings of 61 cents were in line with the Zacks Consensus Estimate and increased only 1.7% year over year. Though sales grew only 3% on a year-over-year basis, it lagged the Zacks Consensus Estimate. The slowdown in the industrial segment due to the sluggish demand from quick service restaurants is putting pressure on sales.

However, McCormick’s consumer business segment is doing well, driven by the recent acquisition of the Chinese broth maker Wuhan Asia-Pacific Condiments Co. Ltd. (“WAPC”). The WAPC acquisition has enhanced McCormick’s product portfolio with new flavors and expanded the latter’s presence in the central regions of China. McCormick has also raised its sales projection for fiscal 2013 to include the impact of the acquisition.

Following the release of its second quarter results, the Zacks Consensus Estimate for fiscal 2013 went down 0.9% to $3.16 per share. The Zacks Consensus Estimate for fiscal 2014 also declined 0.9% to $3.48 per share.

The company now has a Zacks Rank #3 (Hold).

Cause for Concern

McCormick’s industrial segment has been under pressure due to the slowdown in demand from quick service restaurants, primarily in the U.S and Asia, over the last few quarters. In the U.S., quick service restaurant demand was soft due to promotional emphasis on menu items not flavored by McCormick, while in Asia, demand was impacted by consumer concern about bird flu in China. In addition, low disposable income of consumers and a high single-digit increase in raw material and packaging costs have been hurting the margins of the company and therefore its profitability.

Though McCormick focuses on cost savings, productivity improvements, product innovation and expansion in emerging markets, we believe that currency headwinds, slow economic recovery in the U.S. and pressure on industrial business sales create an overhang

Other diversified food makers worth considering include Pinnacle Foods Inc (PF - Free Report) , Chiquita Brands International Inc and Dole Food Co. . While Pinnacle and Chiquita carry a Zacks Rank #1 (Strong Buy), Dole Food holds a Zacks Rank #2 (Buy).

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