McCormick & Co. Inc. (MKC - Free Report) posted second-quarter fiscal 2017 results, wherein both the company’s earnings and revenues outpaced the Zacks Consensus Estimate. Shares were up 1.87% in the pre-market trading.
Adjusted earnings of 82 cents per share beat the Zacks Consensus Estimate of 77 cents by 6.5%. We note that the company has delivered positive earnings surprise in 12 of the last 14 straight quarters. In the third quarter, adjusted earnings were also 9% higher year over year owing to 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
In the reported quarter the global leader in flavors and spices generated revenues of $1.11 billion, which exceeded the Zacks Consensus Estimate of $1.09 billion by 1.4%. Revenues grew about 5% from the prior-year quarter, despite currency headwinds of 2%. Sales were driven by strong base business and impressive product portfolio growth. The acquisitions (Gourmet Garden in Apr 2016 and Enrico Giotti SpA in Dec 2016) also contributed to higher sales by 3%.
Product innovation, brand marketing support and expanded distribution as well as pricing actions contributed to the growth in sales, offsetting the negative impact of currency. Excluding currency headwinds, revenues grew 7%, driven by both the consumer and industrial segments.
The company’s adjusted operating income grew 6.2% to $137 million in the second quarter. On a constant currency basis, it increased 9% due to higher sales and cost savings which were offset by increase in brand marketing expenses and currency headwinds. A shift in the portfolio to more value added products also boosted sales.
Consumer Business: Segment revenues grew 2%, primarily driven by strong base business and new product sales compared with the year-ago period. Solid performance in the Americas, strong momentum in China and the incremental impact of Gourmet Garden were partially offset by the impact of challenging environments in Europe, Middle East and Africa (EMEA) region. Currency also hurt the segment by 2%. Sales rose 2% on a constant currency basis. While Sales increased on a constant currency basis in the Americas and Asia/Pacific, it declined in Europe, Middle East and Africa (EMEA) due to weak sales in the U.K. where the retail environment suffers from stiff competition.
Adjusted operating income grew 7%, on a constant currency basis, driven by the favorable impact of sales growth and cost savings more than offsetting the impact of higher material costs.
Industrial Business: Industrial segment sales grew 9% despite currency headwinds of 3%. Industrial revenues growth was driven by increased sales across all three of its regions, including the incremental impact of the acquisition of Giotti, acquired in Dec 2016. On a constant currency basis, segment sales increased 12% year-over-year and doubled from the sequential quarter.
On a constant currency basis, adjusted operating income rose 13% year over year, driven by favorable impact of higher sales, product mix and CCI-led cost savings, more than offset the unfavorable impact of increases in material costs and an increase in brand marketing.
Fiscal 2017 Guidance
For fiscal 2017, the company has lowered its currency impact on sales. The company now expects sales to grow approximately 4–6% in fiscal 2017, in comparison with approximately 3–5% announced earlier.
Excluding currency, McCormick has reaffirmed its sales growth and adjusted earnings outlook. The company continues to expect the projected sales growth rate in the range of 5–7%, on a constant currency basis. The company expects higher brand marketing, increased pricing, new products, expanded distribution and acquisitions to contribute to the growth. Further, the company anticipates pricing actions to offset an anticipated mid-single digit increase in material costs. The company also has plans to achieve approximately $100 million of cost savings.
The company expects 2017 adjusted operating income to grow approximately 8–10%, from adjusted operating income of $657 million in 2016. On constant currency basis, adjusted operating income is expected to grow 9–11%.
McCormick expects 2017 adjusted earnings in the range of $4.05–$4.13 per share, which marks an increase of 7–9% compared with $3.78 in 2016. The guidance also includes unfavorable currency headwinds of 2 percentage points. The Zacks Consensus Estimate for fiscal 2017 is $4.08 per share, which is within the guidance range.
Overall, McCormick is focusing on driving revenues through acquisitions and expects the momentum to continue in fiscal 2017. Its cost-saving initiative is also appealing. However, earnings growth is likely to be hurt by higher brand-marketing expenses.
Share Price Movement
If we look into past six months’ performance, McCormick’s shares have outperformed the Zacks categorized Food-Miscellaneous/Diversified industry. The stock rallied 6.0% against the industry’s decline of 5.3%.
Zacks Rank & Key Picks
McCormick currently carries a Zacks Rank #3 (Hold).
Some better-ranked food companies include SunOpta, Inc. (STKL - Free Report) , Aramark (ARMK - Free Report) and B&G Foods, Inc. (BGS - Free Report) .
While SunOpta has a Zacks Rank #1 (Strong Buy) and a long-term earnings growth rate of 15.00%, Aramark and B&G Foods, both carrying a Zacks Rank #2 (Buy) have long-term earnings growth rate of 12.00% and 10.00%, respectively. All of the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
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