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Why Is McCormick (MKC) Down 4.3% Since Last Earnings Report?

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It has been about a month since the last earnings report for McCormick (MKC - Free Report) . Shares have lost about 4.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is McCormick due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

McCormick's Q3 Earnings Beat Estimates, Sales Up Y/Y

McCormick posted robust third-quarter fiscal 2020 results, with the top and the bottom line surpassing the Zacks Consensus Estimate. Moreover, earnings and sales increased on a year-over-year basis.

Performance in the quarter gained from continued rise in at-home consumption trends, which favorably impacted the company’s consumer business. Moreover, the company announced a 2-for-1 stock split and provided its view for fiscal 2020. Management commented that its outlook for the year is based on expectations that at-home consumption trends will continue to remain favorable. Moreover, the momentum being witnessed by the company in the fourth quarter positions it well to achieve the set targets for the year.

Quarter in Detail

Adjusted earnings of $1.53 per share increased nearly 5% on a year-over-year basis. Moreover, the metric surpassed the Zacks Consensus Estimate of $1.52 per share. The bottom line gained from higher adjusted operating income along with reduced interest expenses.

This global leader of flavors and spices generated sales of $1,430.3 million, up nearly 8% year over year and including currency headwinds of 1%. On a constant-currency (cc) basis, sales increased 9%. Also, sales in the quarter surpassed the Zacks Consensus Estimate of $1,392 million. Top-line results were driven by growth in the consumer segment.

Gross margin expanded 70 basis points (bps) to 41.3% on favorable product mix as well as savings from the Comprehensive Continuous Improvement (CCI) program. These were partially offset by COVID-19 related costs. Adjusted operating income improved 5% (up 6% at cc) to reach $273.1 million. However, the adjusted operating margin contracted 60 bps to 19.1%.

Segment Details

Consumer Business: Sales increased 15% to $910.9 million. The segment gained from higher at-home cooking trends across the Americas and EMEA regions. Additionally, strong brand marketing, consumer digital connections and new products acted as upsides. Sales in the Americas surged 17% due to broad based growth across the company’s portfolio. In the EMEA region, sales increased 23% on the back of broad-based growth, with particular rise in branded spices and seasonings, homemade dessert products and branded dry recipe mixes. However, sales in the Asia-Pacific region declined 9% due to softness in products related to away from home consumption.

Flavor Solutions: Sales in the segment fell 3% from the prior-year quarter’s figure to $519.4 million, thanks to weak demand from restaurants and other foodservice customers in the Americas and EMEA regions. Sales in the Americas declined 5% due to decline in sales to branded foodservice consumers as well as quick service restaurant customers. Sales in the EMEA region dropped 1% year over year. Nevertheless, sales in the Asia-Pacific region rose 5% driven by increased sales to quick service restaurants in China and Australia.

Financial Update

McCormick exited the quarter with cash and cash equivalents of $221 million, long-term debt of $3,737.5 million and total shareholders’ equity of $3,932.7 million. For nine months ended Aug 31, net cash provided by operating activities was $626.7 million.

The company announced a 2-for-1 stock split for its common and common non-voting shares. The additional shares will be distributed by the company on Nov 30, 2020, to shareholders held in record as of Nov 20. As a result of this spilt, the number of outstanding common and common non-voting shares will be doubled. The company expects to begin trading on a split-adjusted basis from Dec 1, 2020.

Outlook

Strong results in the third quarter have helped McCormick gain better visibility for the fiscal year. This encouraged management to provide its guidance for the year. The company expects to achieve sales increase in the higher end of 4-5% (up 5-6% at cc) on a year-over-year basis. The growth is expected to be completely organic, backed by new products, brand marketing and expanded distribution. Moreover, the company expects at-home consumption trends to remain favorable owing to the ongoing pandemic.

Further, adjusted operating income is expected to increase in the band of 4% to 5%, (up 5% to 6% at cc) compared with the prior-year quarter’s figure. Adjusted earnings are expected in the range of $5.64-$5.72, reflecting a rise of 5-7% (up 6-8% at cc) from $5.35 delivered in the year-ago quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -5.16% due to these changes.

VGM Scores

At this time, McCormick has a nice Growth Score of B, a grade with the same score on the momentum front. However, 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, McCormick has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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