McCormick & Co. Inc. (MKC) announced its financial results for the second-quarter of 2011 on June 30 with operating earnings of 55 cents a share, surpassing the Zacks Consensus Estimate by one cent.
In the following paragraphs, we cover the recent earnings announcement, subsequent analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation for the stock.
Earnings Recap
McCormick’s second-quarter earnings benefited from higher operating income, as well as the cost saving actions.
Total revenue grew 11% year-over-year to $883.7 million from the year-earlier quarter, benefiting from McCormick’s favorable volume, product mix and pricing actions taken to curtail increased raw and packaging material costs.
Revenues exceeded the Zacks Consensus Estimate of $855 million.
(Read our full coverage on this earnings report: McCormick Beats by a Penny)
Earnings Estimates Revision – Overview
Fiscal 2011 earnings estimates have declined mostly for McCormick since the earnings release due to cost pressure; while analysts have moved in an upward direction for fiscal 2012 estimates. It means that analysts are neutral about the long-term performance of the company. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
In the last 7 days, none out of 9 analysts covering the stock have revised their estimates upward while 7 have lowered the same. For fiscal 2012, earnings estimates were raised by 7 analysts out of 14 covering the stock, and none downgraded the stock during the same time period.
This indicates no clear directional movement for the fiscal year earnings and signifies that the analysts are circumspect about the long-term trend earnings of the company.
Management believes that the company has strong operating income, and is trying to curtail increasing costs by cost-saving actions.
Magnitude of Estimate Revisions
Earnings estimates for fiscal 2011 have decreased by 5 cents in the last 7 days to $2.79. However, for fiscal 2012, earnings estimates have jumped by 3 cents to $3.13 during the same time period.
McCormick recently acquired 100% of the shares of Kamis S.A., which is expected to close by the end of third quarter of 2011. The profits in the businesses will be minimal in 2011 due to integration costs and initial investments in growth. This is expected to lower earnings per share in the third quarter by 5 cents, but is expected to be 7 cents-9 cents accretive to earnings per share in 2012.
Our Recommendation
McCormick has a significant presence in the international market. The company’s consumer brands reach approximately 100 countries. The significant international presence has boosted its growth, and we believe will continue doing so in the coming years.
In addition, McCormick has made multiple acquisitions that have contributed to growth. Acquisitions have added 2% to average annual sales growth over the past five years.
However, though the company has completed multiple acquisitions that have expanded its product portfolio, such a strategy has inherent risks. Additionally, the competitive nature of the market in which McCormick operates is a matter of concern.
McCormick, which competes with ConAgra Foods, Inc. (CAG) and Krafts Food Inc. (KFT), currently holds a Zacks #3 Rank translating into a short term ‘Neutral’ rating.
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