McCormick & Co. Inc. (MKC - Analyst Report) delivered better-than-expected results in the third quarter of fiscal 2016, where both earnings and revenues beat the Zacks Consensus Estimate. The company has also raised its financial guidance for full year 2016.
Adjusted earnings of $1.03 per share beat the Zacks Consensus Estimate of 95 cents by 8.4%. Moreover, it was 21.1% higher year over year, owing to favorable tax rate and higher operating income. Further, the favorable impact of higher sales and cost savings were offset by an increase in brand marketing and material costs, and currency headwinds.
Revenues and Profits
The global leader in flavors and spices delivered third quarter revenues of $1.091 billion, which marginally beat the Zacks Consensus Estimate by 0.2%. Revenues grew about 3% from the prior-year quarter, driven by acquisitions (Stubbs and Gourmet Garden), which added 2% to the sales increase.
Product innovation, brand marketing support and expanded distribution, as well as pricing actions also led to sales growth, offsetting the negative impact of material costs and currency. Excluding currency headwinds, revenues grew 6%.
The company’s adjusted operating income grew 11.7% to $172 million in the third quarter. On a constant currency basis, it increased 15%, owing to higher sales and cost savings more than offsetting material cost inflation and brand marketing expenses.
Consumer Business: Segment revenues grew 7% on a constant currency basis, driven by acquisition gains, increased volume, better product mix as well as pricing actions. Sales increased on a constant currency basis in all the regions of Americas, Europe, Middle East and Africa (EMEA), and Asia/Pacific.
On a constant currency basis, adjusted operating income rose 12% driven by the favorable impact of sales growth and cost savings more than offsetting the increase in brand marketing expenses and unfavorable impact of higher material costs.
Industrial Business: Segment revenues increased 4% year over year on a constant currency basis in the third quarter, driven by higher sales, improved volumes, higher pricing in response to higher material costs and improved product mix. Sales increased on a constant currency basis in all the regions of Americas, EMEA and the Asia/Pacific.
On a constant currency basis, adjusted operating income increased 23% year over year, as the favorable impact of higher sales and cost savings more than offset the unfavorable impact of increases in material costs and brand marketing expense.
Raised Fiscal 2016 Guidance
The company has raised its earnings and sales growth outlook for 2016 driven by strong year-to-date performance and current projection for the fourth quarter.
The company expects sales to grow approximately 3%, which is at the upper end of its previous range. Excluding the estimated impact of unfavorable currency rates, the projected growth rate is approximately 6%. The company expects higher base business sales, new products, acquisitions and pricing to contribute to this growth rate.
The company expects 2016 adjusted operating income to grow approximately 7%, which is at the upper end of its range of 5% to 7% increase from adjusted operating income of $614 million in 2015. In constant currency, adjusted operating income is expected to grow approximately 10%.
McCormick continues to expect 2016 adjusted earnings to be in the range of $3.75 to $3.79 per share, up from the previous guidance of $3.68 to $3.75 per share. The new guidance marks an increase of 8% to 9% compared with $3.48 in 2015. On a constant currency basis, adjusted earnings are expected to grow in the range of 12% to 13%. The Zacks Consensus Estimate for fiscal 2016 stands at $3.75 per share, which is at the lower end of the guidance.
Overall, McCormick is focusing on building sales through acquisitions, and expects strong sales momentum to continue in fiscal 2016. Its cost saving initiative is also appealing. The company expects currency headwinds to continue in 2016. However, earnings growth might get hurt by higher brand marketing expenses.
Currently, McCormick has a Zacks Rank #2 (Buy).
Other well-positioned consumer staple companies include Omega Protein Corp. (OME - Snapshot Report) , US Foods Holding Corp. (USFD - Snapshot Report) and Ingredion, Inc. (INGR - Snapshot Report) .
Omega Protein has an average positive earnings surprise of 24.01% in the trailing four quarters and also has a long term earnings growth rate of 8.00%, while US Foods has a long term earnings growth rate of 18.59%. Both sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Ingredion, holding a Zacks Rank #2, has an average positive earnings surprise of 9.63% in the trailing four quarters and also has a long term earnings growth rate of 11.00%.
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