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Why Is McCormick (MKC) Down 8.5% Since Last Earnings Report?

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It has been about a month since the last earnings report for McCormick (MKC - Free Report) . Shares have lost about 8.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is McCormick due for a breakout? 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 drivers.

McCormick Q4 Earnings & Sales Miss Estimates

McCormick posted fourth-quarter fiscal 2019 results. Adjusted earnings of $1.61 per share dropped 3.6% on a year-over-year basis and missed the Zacks Consensus Estimate of $1.63. The decline was accountable to the unfavorable tax rate. A rise in adjusted operating profit failed to compensate for the decline.

This global leader of flavors and spices generated sales of $1,484.8 million that inched up roughly 1% year over year, including currency headwinds of roughly 1%. On a constant-currency (or cc) basis, sales rose 2%. McCormick’s top-line growth was driven by improvements in both segments. However, sales fell short of the Zacks Consensus Estimate of $1,511 million.

Gross margin expanded 120 basis points (bps) to 42.4% on savings from the Comprehensive Continuous Improvement (CCI) program.  

Adjusted operating income increased 3% to $303 million and rose 4% at cc. Further, the adjusted operating margin expanded 40 bps to 20.4%. The upside can be attributable to improved sales and gross margin. This was somewhat countered by a planned increase in investments toward brand marketing.

Notably, McCormick achieved cost-savings of $119 million in fiscal 2019, courtesy of the CCI program. This also helped the company see adjusted operating margin growth of 80 bps in the fiscal. Taking this into account, the company has realized savings of $463 million since fiscal 2016, exceeding its four-year goal of $400 million.

Segment Details

Consumer Business: Sales grew 1% to $966.6 million and rose 2% at cc on the back of strength in the Americas and the Asia Pacific. Sales in the Americas rose 2% at cc. This was mainly driven by solid U.S. branded improvements. Sales in the Asia-Pacific region rose 3% at cc, courtesy of efficient pricing and holiday-season promotions. In the EMEA region, sales dipped 1% at cc mainly due to soft sales of private-label products.

Flavor Solutions: Sales in the segment climbed 2% from the prior-year quarter’s $518.2 million. At cc, sales rose 3% year over year, backed by strength in all regions. Sales in the Americas advanced 3% at cc, owing to growth in the base business, contributions from new products and sustained momentum in the snacks seasoning and branded foodservice categories. Sales in the EMEA region improved 5% at cc, driven by volume growth and favorable product mix. Sales in the Asia-Pacific region improved 2% at cc, owing to sales to quick-service restaurants.

Financial Update

McCormick exited the quarter with cash and cash equivalents of $155.4 million, long-term debt of $3,625.8 million and shareholders’ equity of $3,456.7 million. For fiscal 2019, net cash provided by operating activities was $946.8 million. McCormick’s net debt-to-adjusted EBITDA ratio stood at 3.4x at the end of fiscal 2019.

Fiscal 2020 Guidance

For fiscal 2020, McCormick anticipates consumer demand to continue witnessing global growth. Management is focused on catering to consumers’ demands through effective brand marketing, product launches and extended distribution. While management expects sales to drive the underlying business performance, the same is likely to be negatively impacted by increased investments related to business transformation and higher expected tax rate. Excluding the impact of these factors, underlying growth is expected to be strong in fiscal 2020.

The company expects sales growth of 2-4%. It anticipates achieving top-line growth completely on an organic basis, as it envisions no benefits from acquisitions. That said, sales are likely to be driven by product launches, and expanded distribution and marketing. Also, strong pricing is expected to drive sales.

In fact, management anticipates pricing and cost-saving efforts to help the company counter an expected mid-single-digit cost inflation in fiscal 2020. Incidentally, the company expects to achieve cost savings of nearly $105 million in fiscal 2020, which will be utilized for enhancing margins, sponsoring growth-oriented investments and offsetting high costs.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, McCormick has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, McCormick has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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