We have reiterated our Neutral rating on McCormick & Company, Inc. (MKC) following second quarter results, where earnings of 60 cents per share fell shy of the Zacks Consensus Estimate by a penny, However, the result topped the prior-year quarter’s earnings of 55 cents on the back of robust sales and efficient cost management.
The company also reported encouraging sales growth due to its strong brand portfolio that includes McCormick, Lawry’s, Zatarain’s, Thai Kitchen, Simply Asia and Club House in the US; as well as Ducros, Vahine, Schwartz and Kamis in Europe and the Middle East and Africa (EMEA).
New product innovations like Zatarain's Frozen Meals for Two, Grill Mates Blends, Marinades and Barbeque sauces as well as new McCormick Gourmet and McCormick Recipe Mixes were launched recently.
Moreover, McCormick is strategically increasing its presence in emerging markets to meet the growing demand for spices in these fast growing nations. In 2011, the company completed the acquisitions of US-based Kitchen Basics, Inc. and Poland-based Kamis S.A. The company also completed the joint venture with India-based Kohinoor Foods Ltd.
However, McCormick has been suffering from high material costs since last few years. The increase in price of raw materials such as dairy products, pepper, wheat, onion, capsicums, soybean oil and garlic adversely impacts the company’s gross margins.
To combat the above mentioned difficulty, McCormick has undertaken a program, namely, Comprehensive Continuous Improvement (‘CCI’) program to increase its investments, thereby leading to increased sales, operating income and profit. The company expects to generate cost savings of at least $45 million under the CCI program in fiscal 2012.
McCormick experienced a difficult macroeconomic environment in fiscal 2011, and expects the same to persist in fiscal 2012. The company remains exposed to unfavorable foreign currency translations as it has a considerable international presence. The company also faces interest rate risk due to fluctuation in these rates. With increased investments in emerging markets, McCormick is exposed to the economic and political risks of these countries. Further, the company faces intense competition from its rivals, such as Procter & Gamble Company (PG).
Currently McCormick holds a Zacks #3 Rank, implying a short term ‘Hold’ rating.
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