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McCormick (MKC) Up 4.7% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for McCormick (MKC). Shares have added about 4.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is McCormick due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

McCormick Q1 Earnings Top Estimates, Sales Increase Y/Y

McCormick reported first-quarter fiscal 2023 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate, and the former increased year over year.

Adjusted earnings of 59 cents per share declined from 63 cents in the year-ago quarter. However, the metric surpassed the Zacks Consensus Estimate of 49 cents per share. The year-over-year decrease was a result of increased interest costs and an elevated adjusted effective tax rate.

The company generated sales of $1,565.5 million, up 3% year over year. Constant-currency (cc) sales increased 5% on 11% growth from pricing actions, somewhat offset by a 2% decline in volumes. The top line came ahead of the Zacks Consensus Estimate of $1,545 million.

The volume decline stemmed from the Kitchen Basics divestiture, reduced consumption in China due to the pandemic, the exit of the Consumer business in Russia and a 3% decline from all other volumes and a product mix.

The company’s gross profit margin contracted 80 basis points due to escalated cost inflation and higher other supply-chain expenses. These were somewhat countered by cost savings from the Comprehensive Continuous Improvement (“CCI”) and Global Operating Effectiveness (“GOE”) programs, along with pricing actions.

The adjusted operating income was $227 million, in line with the year-ago quarter figure. At cc, the adjusted operating income rose 2%, backed by increased sales, partly negated by a gross margin decline.

Consumer: Sales went down 2% to $909.5 million, while cc sales increased 1% due to a 9% rise in pricing, somewhat offset by soft volumes. The volume decline included the adverse impacts of the Kitchen Basics divestiture, reduced consumption in China due to the pandemic and the exit of Consumer the business in Russia. Sales increased 3% in the Americas, while the same tumbled 9% in the EMEA and 15% in the Asia/Pacific.

Flavor Solutions: Sales in the segment advanced 10% to $656 million. On a cc basis, sales grew 12% due to solid pricing actions, partly negated by soft volumes and a product mix. Flavor Solutions’ sales in the Americas grew 13%. Flavor Solutions sales in the EMEA rose by 7%. Sales in the Asia/Pacific market dipped 1% year over year.

Fiscal 2023 Guidance

McCormick anticipates fiscal 2023 to witness a solid underlying business performance, backed by sales growth. It expects the GOE Program and the lapping of pandemic-led hurdles to have a positive effect on the fiscal 2023 operating income, which is likely to be somewhat negated by the impacts of the Kitchen Basics divestiture and a rise in employee incentive compensation costs.

Management anticipates currency movements to have a minimal impact on fiscal 2023 net sales, operating income and earnings per share (EPS).

For fiscal 2023, net sales are expected to increase 5-7% from the fiscal 2022 levels. Management expects sales growth to be fueled by pricing actions, which, along with cost savings, are likely to help it counter inflationary headwinds. The company anticipates seeing solid growth via brand strength, brand marketing, new products, category management and differentiated customer engagement.

The adjusted operating income is likely to grow 9-11%. Management envisions the adjusted EPS in the band of $2.63-$2.68 in fiscal 2023.

The company expects adjusted earnings in the band of $2.56-$2.61 per share in fiscal 2023, suggesting 1-3% growth. The bottom line is likely to be fueled by a solid operating performance, partly offset by increased interest expenses and a higher projected adjusted effective tax rate.

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How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

At this time, McCormick has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise McCormick has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

Performance of an Industry Player

McCormick is part of the Zacks Food - Miscellaneous industry. Over the past month, General Mills (GIS), a stock from the same industry, has gained 3.4%. The company reported its results for the quarter ended February 2023 more than a month ago.

General Mills reported revenues of $5.13 billion in the last reported quarter, representing a year-over-year change of +13%. EPS of $0.97 for the same period compares with $0.84 a year ago.

For the current quarter, General Mills is expected to post earnings of $1.05 per share, indicating a change of -6.3% from the year-ago quarter. The Zacks Consensus Estimate has changed +0% over the last 30 days.

General Mills has a Zacks Rank #2 (Buy) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of D.

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