We reaffirm our Neutral recommendation on McCormick & Co, Inc (MKC) following mixed results in the third quarter of 2013.
Why the Reiteration?
McCormick reported third quarter results on Sep 26. Earnings of 78 cents per share were in line with the prior-year quarter and the Zacks Consensus Estimate. Higher operating income and lower share count were largely offset by a tax rate increase in the quarter.
However, sales lagged the Zacks Consensus Estimate though it grew 4% year over year. The slowdown in the industrial segment due to sluggish demand from quick service restaurants is pressurizing sales, primarily in the U.S and Asia over the last few quarters.
In the U.S., quick service restaurants witnessed lower traffic and emphasized on menu items that do not use McCormick flavors. In Asia, demand was impacted by consumer concern about bird flu in China. We do not expect the pressure on industrial business sales to ease until the end of this fiscal year.
However, McCormick’s consumer business segment is doing well, driven by the acquisition of the Chinese broth maker Wuhan Asia-Pacific Condiments Co. Ltd. (WAPC) in May 2013. The WAPC acquisition has enhanced McCormick’s product portfolio with new flavors and expanded its presence in the central regions of China.
We are also impressed with McCormick’s increasing focus on saving costs and enhancing productivity through its ongoing initiative, Comprehensive Continuous Improvement (CCI) program, which started in 2009. Last month, the company included Europe, Middle East and Africa (EMEA) into its CCI program and introduced several initiatives in that region.
These initiatives will help in achieving annual cost savings of approximately $10 million by 2015. McCormick has now raised its long-term projected cost savings to at least $45 million from $40 million projected earlier.
Though McCormick focuses on cost savings, productivity improvements, product innovation and expansion in emerging markets, we believe that currency headwinds, slow economic recovery in the U.S. and pressure on industrial business sales create an overhang.
Following the release of its third quarter results, the Zacks Consensus Estimate for fiscal 2013 went down 0.9% to $3.13 per share. The Zacks Consensus Estimate for fiscal 2014 also declined 1.4% to $3.43 per share. The company now has a Zacks Rank #3 (Hold).
Other diversified food makers worth considering include Omega Protein Corp. (OME), Pinnacle Foods Inc (PF), and The J. M. Smucker Co. (SJM). While Omega holds a Zacks Rank #1 (Strong Buy), Pinnacle and Smucker carry a Zacks Rank #2 (Buy).
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