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McCormick (MKC) Up 4.8% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for McCormick (MKC - Free Report) . Shares have added about 4.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is McCormick due for a pullback? 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 catalysts.

McCormick Beats on Q1 Earnings, Solid Pricing a Driver

McCormick reported first-quarter fiscal 2022 results, with the earnings and sales beating the Zacks Consensus Estimate. The bottom line declined year over year while the top line improved.

The year-over-year sales increase reflects strength in the company’s global flavor portfolio and effective pricing actions. The company’s Flavor Solutions gained from the solid performance of packaged food and beverage customers and robust demand from the restaurant and other foodservice customers. The Consumer segment’s sales were impacted by the lapping of increased year-ago demand. However, the segment continues to reflect the sustained shift to higher at-home consumption relative to pre-pandemic levels. Although McCormick is operating in a highly inflationary environment, it expects to fully offset cost pressures over time via cost savings and pricing actions. The company is on track to capitalize on a sustained shift to cooking more at home, higher digital engagement, clean and flavorful eating and trusted brands.

Quarter in Detail

Adjusted earnings of 63 cents per share declined from 72 cents in the year-ago quarter. The downside stemmed from reduced adjusted operating income. However, the metric surpassed the Zacks Consensus Estimate of 59 cents per share.

This global leader in flavor generated sales of $1,522.4 million, up 3% year over year. This includes an unfavorable impact from currency translation of 1%. Sales from FONA (acquired in December 2020) contributed 1% to sales growth. Strength in the company’s Flavor Solutions segment drove growth. On a cc basis, sales were up 4%. The top line surpassed the Zacks Consensus Estimate of $1,442 million.

The company’s gross profit margin contracted 220 basis points to 36.8%, thanks to increased cost inflation. These were somewhat countered by cost savings from the Comprehensive Continuous Improvement (CCI) program and favorable pricing.

Operating income was $207 million, down from $236 million reported in the year-ago quarter.

Segment Details

Consumer: Sales went down 2% to $926.1 million, with a negligent impact from foreign currency translation. Performance in the segment reflects pricing actions undertaken to somewhat offset cost inflation. Consumer sales in the Americas increased 2%. Consumer sales in Europe, Middle East and Africa (EMEA) fell 14%. Consumer sales in the Asia/Pacific market decreased by 4%.

Flavor Solutions: Sales in the segment increased 12% (up 14% at cc) to $596.3 million, led by gains from base business, new products and acquisition. The metric includes 2% growth from the FONA buyout. Management highlighted that the segment’s sales gained from differentiated customer engagement, pricing actions undertaken to combat costs and continued demand recovery of away-from-home products. Flavor Solutions sales in the Americas increased 12%, while the metric moved up 15% in the EMEA region. Sales in the Asia-Pacific region rose 3%, driven by higher growth from quick-service restaurants.

Financial Update

McCormick exited the quarter with cash and cash equivalents of $338.4 million, long-term debt of $3,964.5 million and total shareholders’ equity of $4,614.2 million. For the three months ended Feb 28, 2022, net cash provided by operating activities amounted to $17.9 million.

Fiscal 2022 Outlook

McCormick reiterated its fiscal 2022 outlook. The company expects to achieve sales growth of 3-5% (up 4-6% at cc) year over year. Management anticipates sales to be led by new products, brand marketing, category management as well as differentiated customer engagement. The company’s pricing actions and cost savings are likely to offset projected inflationary pressures. Adjusted operating income is expected to increase in the band of 7-9% (up 8-10% at cc). Adjusted EPS are expected to be $3.17-$3.22. The company had reported an adjusted EPS of $3.05 in fiscal 2021. The earnings growth reflects solid operating growth, partially offset by a 3% headwind from a projected increase in the estimated adjusted effective tax rate.

 

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, McCormick has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, 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 F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

McCormick has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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