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Will McCormick’s Strategic Efforts Help Sustain Momentum?

Zacks

McCormick & Company, Inc. MKC looks good on the back of its strong portfolio, product innovation and other strategic moves. Shares of this Zacks Rank #3 (Hold) company have outperformed both the Zacks categorized Food – Miscellaneous/Diversified industry and the broader sector in the past one year. The stock rallied 7.2%, while the industry gained 2.1%. Moreover, the Zacks categorized Consumer Staples sector, of which they are part of, rose 2.5% over the same time frame.



Growth Drivers

McCormick boasts a robust brand portfolio and regularly enhances its products through innovation in order to remain competitive and tap the rising demand for new flavors, spices and herbs. Moreover, health and wellness continue to drive its innovation agenda. Looking forward, management expects to persist in improving its portfolio of spices, and is banking on digital marketing to build consumer awareness and propel its volume.

Meanwhile, McCormick is shaping up its portfolio with gluten-free, non-GMO and organic products to satisfy the evolving needs of consumers. The company has also been strategically increasing its presence through acquisitions in order to grow its spices and seasonings portfolio. Additionally, it is extending its reach in the emerging markets.

Alongside, the company remains focused on saving costs and enhancing productivity through its ongoing Comprehensive Continuous Improvement (CCI) program. Moving ahead, management expects cost savings of roughly $100 million in fiscal 2017 and is on track to achieve $400 million target by 2019. Furthermore, it anticipates earnings per share growth to be in line with its long-term target 9–11% in constant currency, supported by greater sales and productivity enhancement.

Throwing light upon McCormick’s financial performance, we note that its earnings have outpaced the Zacks Consensus Estimate in 12 of the past 14 quarters, including the first quarter of fiscal 2017. Also, the company’s revenues have outperformed our estimate in five of the trailing seven quarters. In the fiscal first quarter, both the company’s top and bottom lines rose year over year driven by acquisitions and cost-savings measures.

Hurdles/Concerns

McCormick’s revenues missed the Zacks Consensus Estimate in the recently reported first quarter. Results were somewhat hurt by an increase in brand marketing and material costs, higher tax rate as well as currency headwinds. Management also provided soft guidance for the second quarter. For the fiscal second quarter, the company anticipates earnings to be down slightly from the year-ago period due to higher taxes and greater marketing costs.

Management has reiterated its fiscal 2017 outlook and continues to expect adjusted earnings in the range of $4.05–$4.13 per share, which marks an increase of 7–9% compared with $3.78 in 2016. In fact, the guidance includes unfavorable currency headwinds of 2 percentage points.

Consequently, the Zacks Consensus Estimate of 77 cents and $4.08 for the second quarter and fiscal 2017 declined 5 cents and 1 cent, respectively, over the past 30 days.

Furthermore, McCormick faces headwinds from higher raw material costs, which remains a concern. Also, the ongoing headwinds in the restaurant industry and U.S. grocery industry are also weighing on its sales.

Key Picks

Better-ranked stocks in the same industry include Pinnacle Foods Inc. PF, Treehouse Foods, Inc. THS and Lamb Weston Holdings, Inc. LW, all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Pinnacle Foods, with a long-term earnings growth rate of 8.3% has increased nearly 32% in the past one year.

Treehouse Foods, with a long-term earnings growth rate of 15.2% has jumped 24.1% year to date.

Lamb Weston Holdings, with a long-term earnings growth rate of 4.2% surged 39.7% in the past six months.

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