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McCormick Rallies on Savings Efforts, Buyouts & Tax Gains

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McCormick & Company Inc. (MKC - Free Report) has been faring well in the industry, buoyed by yielding buyouts and cost-containment efforts. This has aided year-over-year growth in top and bottom lines for more than a year now. Let’s now look into some of the factors that have been supporting this global leader in spices and seasonings, alongside analyzing the hurdles that have been denting performance.

Acquisitions Provide Scope for Growth  

Buyouts have been aiding McCormick to expand flavors business and reap grater profitability. The buyout of the food division of RB Foods in August 2017, is the largest deal by the company till date. With iconic brands like Frank's RedHot Sauce and French's Mustard, RB Foods is likely to continue as an asset for McCormick’s spices portfolio.

The buyouts of RB Foods and Enrico Giotti SpA bolstered performances of consumer and flavor solutions units, driving sales by 12% during the first quarter of fiscal 2018. Notably, a number of companies operating in the food industry such as TreeHouse Foods (THS - Free Report) and Sysco Corp. (SYY - Free Report) have also been resorting to strategic buyouts to widen prospects.

Effective Cost Management

Moving on, McCormick’s Comprehensive Continuous Improvement (“CCI”) program has been an aspect of cheer for a while. The program aids the company to focus on savings and enhance productivity. It has used CCI savings to increase investments, which lead to higher sales and profits.  Notably, cost savings from CCI improved the company’s gross and adjusted operating income margins during the first quarter of fiscal 2018.

This also marked the company’s ninth consecutive quarter of adjusted operating income margin expansion. Further, the company projects adjusted operating income growth in the range of 23-25% in fiscal 2018, wherein it plans to achieve cost savings of $100 million.

Resorting to cost-saving initiatives to induce efficiency is a common practice in the consumer staples space. For instance, Tyson Foods’ (TSN - Free Report) is on track with its Financial Fitness Program with the motive to induce supply-chain efficiencies, reduce overheads and fuel the bottom line.

 

Tax Gains: A Joy Hamper

During the first quarter, McCormick recognized gains of $297.9 million from the recent U.S. Tax Act. This not only boosted the company’s bottom line for the period, but also led management to pass on a portion of its gains to well-deserved employees. Incidentally, McCormick announced bonuses worth $1,000 and plans to increase hourly wage rates for hourly U.S. employees.

Improving wage structure is just one part of McCormick’s plans to strategically reap benefits from the tax reform. The company also plans to invest in organizational growth, debt reduction and provide returns to shareholders.

Gains from tax cuts have enabled management to raise earnings outlook for fiscal 2018. Earnings are expected in the range of $4.85-$4.95, reflecting growth from the previous projection of $4.80-$4.90. The view also takes into consideration the estimated positive impact of nearly one percentage point from currency fluctuations.

Final Thoughts

In spite of the aforementioned upsides, McCormick’s performance continues to be eclipsed by escalating raw material costs, brand marketing and freight expenses. Incidentally, for fiscal 2018, the company expects material costs to escalate in low-single digits.

Nevertheless, we expect this Zacks Rank #3 (Hold) company to easily tide over such hurdles, courtesy of well-chalked savings initiatives. Additionally, positive impacts of buyouts and currency fluctuations are expected to fuel sales growth of approximately 13-15% in fiscal 2018. Indeed, such aspects have been a treat for investors, evident from the stock’s return of 10.9% in the past six months against the industry’s fall of 7.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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