Recently, we reiterated our Neutral recommendation on McCormick & Company, Inc. (MKC) with a target price of $52.00.
McCormick reported operating earnings of 55 cents in the second quarter of 2011, beating the Zacks Consensus Estimate of 54 cents.
The favorable operating income and the cost saving actions of McCormick helped register a robust 11.0% year-over-year increase in net income during the quarter to reach $73.6 million.
The significant upside in revenue was primarily due to McCormick’s favorable volume, product mix and pricing actions taken to curtail increased raw and packaging material costs.
Revenue of $883.7 million in the second quarter of 2011 also exceeded the Zacks Consensus Estimate of $855 million. The strong performance in Consumer and Industrial segments led to a double-digit increase in sales and profit for the second quarter.
Furthermore, its strong international presence is also encouraging. In June, McCormick signed an agreement with India-based Kohinoor Foods Limited for an 85% interest in a joint venture to market a leading brand of 'basmati' rice and other food products in India. The acquisition is expected to close in the third quarter of 2011.
McCormick also agreed to acquire 100% of the shares of Kamis S.A., which is a leader of spices, seasonings and mustard in Poland with annual sales of approximately $105 million.
The acquisition is expected to close by the end of third quarter of 2011. Profits in the businesses will be minimal in 2011 due to integration costs and initial investments in growth, but is expected to be 7 cents-9 cents accretive to earnings per share in 2012. However, the acquisition has led to a decline in the second quarter with the remaining $7 million expected to lower earnings per share in the third quarter by 5 cents.
In addition, McCormick will invest in its brands in the third quarter of 2011 with at least $6 million of incremental marketing spending, which includes an emphasis on creating brand value, a U.S. campaign behind Hispanic products and advertising for the Zatarain’s brand.
However, McCormick has a volatile and inflationary material cost environment, which is a major concern. The increase in price of dairy products, pepper, wheat, onion, pepper, soybean oil and garlic directly and adversely affects the company’s gross profits. Furthermore, inventory is also increasing due to the higher cost of materials, the impact of currency exchange rates, and raw material possession to assure a constant supply of product.
In order to check the prices of raw materials, McCormick combined its pricing actions and cost savings from its Comprehensive Continuous Improvement (CCI) program. CCI is an on-going initiative to improve productivity and reduce costs throughout the organization.
McCormick now expects to deliver at least $45 million of CCI cost savings in 2011. Moreover, McCormick is currently implementing a new inventory management process in order to improve inventory levels.
Overall, we believe that McCormick’s significant presence in the international market and its multiple acquisitions add strength to the company. Also, we believe that acquisitions and joint ventures have become a top priority for McCormick. Both the Kohinoor and Kamis deals were done in an effort to expand sales in emerging markets.
However, the highly competitive market and tough competitors like Kraft Foods Inc. (KFT) and Unilever plc. (UL) leave McCormick a little uncertain.
McCormick currently holds a Zacks #3 Rank which implies a short-term Hold rating.
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MCCORMICK & CO (MKC): Free Stock Analysis Report
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