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Why Is McCormick (MKC) Down 7.5% Since the Last Earnings Report?

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A month has gone by since the last earnings report for McCormick & Company, Incorporated (MKC - Free Report) . Shares have lost about 7.5% in that time frame, underperforming the market.

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

McCormick Q2 Earnings, Revenues Beat on Acquisitions

McCormick & Co. Inc. posted second-quarter fiscal 2017 results, wherein both the company's earnings and revenues outpaced the Zacks Consensus Estimate.

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.

Segment Details

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.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter.

VGM Scores

At this time, McCormick's stock 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.

Our style scores indicate that the stock is equally suitable for momentum and growth investors.


Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift.  Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.

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