Despite several headwinds, McCormick & Company, Inc. MKC has been gaining momentum and is looking to reap long-term gains owing to acquisitions and cost savings measures. We believe these concerns are short term and transitory in nature and therefore leave space for this Zacks Rank #3 (Hold) company to rebound in the long run.
Further, McCormick’s stock price history reveals that the company hasn’t been a disappointment in a long time. In fact, so far this year, shares of this global leader in spices and flavors have risen 4.08%, outperforming the Zacks Categorized Food-Miscellaneous/Diversified Market industry, which showcased growth of just 2.31%.
MCCORMICK & CO Price, Consensus and EPS Surprise
MCCORMICK & CO Price, Consensus and EPS Surprise | MCCORMICK & CO Quote
Underlying Growth Drivers
Estimates have largely been stable since McCormick delivered better-than-expected results in the third quarter of fiscal 2016 on Sep 30. In fact, the company has been delivering better-than-expected earnings and revenues for the last four consecutive quarters. During the third quarter, earnings of $1.03 per share grew 21.1% year over year, owing to a favorable tax rate, cost saving initiatives and higher operating income. Revenues grew about 3% from the prior-year quarter, driven by acquisitions. The company also raised its guidance for fiscal 2016 driven by strong year-to-date performance and current projections for the fourth quarter. The company expects higher base business sales, new products, acquisitions and pricing to back the guidance.
McCormick has been witnessing rising demand for spices, herbs and seasonings over the last few years, which is boosting its sales. Product innovation, brand marketing support and expanded distribution, as well as pricing actions also led to sales growth, offsetting the negative impact of material costs and currency.
The company is largely banking on digital marketing to improve its portfolio of spices, to build consumer awareness and drive volume. In 2016, the company plans to increase brand marketing expenses by at least $15 million in 2016, and to take digital marketing to nearly two-thirds of its total U.S. advertising, up from 46% in 2015.
It is encouraging that McCormick is also focusing on building sales through acquisitions, and expects strong sales momentum to continue in fiscal 2016. McCormick’s regular acquisitions have expanded its spices and seasonings portfolio. In the emerging markets too, the company has extended its reach where it has little or no distribution.
Its cost savings initiatives are also appealing. Cost savings through its ongoing Comprehensive Continuous Improvement (‘CCI’) program has helped the company to focus on reducing costs and enhancing productivity. McCormick expects cost savings in the range of $100−$110 million in fiscal 2016. It expects savings of around $400 million by Nov 30, 2019.
The stock has a long-term earnings per share growth rate of 9.00% and a beta value of 0.47. Further, the stock earns a return on equity of 27.26%, better than other companies like Post Holdings, Inc. POST, Flower Foods, Inc. FLO in the same industry space.
We expect the aforementioned factors to help the company sustain its strong momentum and stay afloat even amid difficult times. Hence, we suggest investors to hold on to the stock as the rest is a wait-and-watch story.
Stock to Consider
A better-ranked stock in the broader consumer staples sector includes Mondelez International, Inc. MDLZ, which holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Mondelez International has an expected earnings growth rate of 13.12%. Further, it has delivered positive earnings surprise in three out of the four trailing quarters, marking an average earnings surprise of 11.20%.
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