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McCormick Gains 8% in 6 Months: Are Buyouts the Only Reason?


McCormick & Company Inc. MKC, a global leader in spices and seasonings, has been setting quite a treat for investors lately. Apart from well-yielding buyouts, the company’s cost-containment measures and efficient product strategies have been driving performance. Moreover, benefits from the recent tax reforms have led management to undertake plans to improve wage structure and raise earnings view for fiscal 2018.

Such aspects have aided shares of this Zacks Rank #3 (Hold) company to surge 8.2% in the past six months, while the industry declined 5.8% in the same time frame. That said, let’s take a closer look at some of the aforementioned drivers and see what hurdles the company has been facing, lately. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Acquisitions Drive Growth

In order to expand its spices and seasonings portfolio, McCormick has been strategically increasing its presence through acquisitions. The buyout of the food division of RB Foods in August 2017, is the largest deal by the company till date. With iconic brands like Frank's RedHot Sauce and French's Mustard, RB Foods is likely to continue as an asset for McCormick’s spices portfolio. Prior to this, the company completed significant acquisitions, including Italy-based Enrico Giotti SpA as well as Australia-based Botanical Food Company. Markedly, additional sales from buyouts of RB Foods and Enrico Giotti SpA drove sales by 12% during the first quarter of fiscal 2018, benefiting performances of consumer and flavor solutions units.

Notably, a number of companies operating in the food industry such as Campbell Soups CPB, Kellog K and Conagra Brands CAG have been resorting to strategic buyouts to widen prospects.

Efforts for Containing Costs

McCormick focuses on saving costs and enhancing productivity through its Comprehensive Continuous Improvement (CCI) program. Cost savings through CCI and streamlining actions amounted to $117 million in fiscal 2017, up from $109 million in fiscal 2016. Notably, cost savings aided in the improvement of the company’s gross and adjusted operating income margins during the first-quarter of fiscal 2018. This marked the company’s ninth consecutive quarter of adjusted operating income margin expansion. The company projects adjusted operating income growth in the range of 23-25% in fiscal 2018, wherein it plans to achieve savings of $100 million.

Tax Cuts Aid Improving Wages & Outlook

The recent tax cuts have been a reason for joy to McCormick. Benefits from reduced taxes led management to rewarded employees with plans to provide bonuses and increase wage rates. Further, advantages from tax cuts led management to raise earnings outlook for fiscal 2018. Earnings are expected in the range of $4.85-$4.95, reflecting growth from the previous range of $4.80-$4.90. The raised outlook also takes into consideration the projected positive impact of nearly one percentage point from currency fluctuations.

Can Savings Offset Cost Woes?

McCormick has been concerned about escalating raw material costs along with increased brand marketing and freight expenses. Moreover, in fiscal 2018, the company expects material costs to escalate in low-single digits. McCormick is also increasing brand marketing expenses to drive sales.

Nevertheless, we expect the aforementioned cost-related hurdles to be adequately cushioned by the company’s robust CCI program and efficient pricing strategies. Apart from these, management expects to continue reaping benefits from its acquisitions, product launches, expanded distribution network and brand marketing. With such positives, McCormick has plenty of reasons to stay encouraged and further raise investors’ optimism in the stock.

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