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Does All Look Rosy for McCormick (MKC) Ahead of Q1 Earnings?

McCormick & Company, Incorporated MKC is slated to release first-quarter fiscal 2019 results on Mar 26. This provider of spices, flavors and more has a mixed bottom-line surprise record in the trailing four quarters. Let’s see what’s in store for the company this time around.


What to Expect?

The Zacks Consensus Estimate for earnings has gone up in the past seven days to $1.07, which shows an increase of 7% from the year-ago quarter’s reported figure. The consensus mark for revenues is $1,239 million, reflecting a marginal rise from the year-ago quarter.

Factors Likely to Impact

McCormick is likely to continue gaining from its focus on strengthening portfolio through innovation and buyouts. Health and wellness also continue to drive the innovation agenda. In fact, the company is well aligned with consumer demand for flavorful healthy eating. Notably, the company’s top line in the fourth quarter of fiscal 2018 gained from new products and advancement in the base business. Management further stated that the company has a strong pipeline of product launches for fiscal 2019, which bodes well for the quarter to be reported.

Further, McCormick has been strategically increasing its presence through acquisitions in order to grow its spices and seasonings portfolio. McCormick’s acquisition of the food division of RB Foods is the largest deal for the company till date. With iconic brands like Frank's RedHot Hot Sauce, French's Mustard and French's Crispy Vegetables, and Cattlemen's BBQ Sauce, RB Foods is likely to continue being an asset for McCormick’s spices portfolio. Well, McCormick successfully concluded the integration of its acquired Frank’s and French’s brands, which are likely to continue driving the company’s sales.

McCormick is also poised to benefit from its brand marketing efforts. In fiscal 2018, brand marketing rallied 18% year over year and was one of the core sales-growth drivers. In fact, since 2011, McCormick has increased its spending on digital marketing to drive brands’ growth. Digital marketing is one of the highest-return investments in brand marketing. The company expects to continue improving its portfolio of spices, and banks on digital marketing to build consumer awareness and drive volumes. However, this is likely to entail escalated costs as discussed below.

Will Hurdles be Offset?

The company has long been battling increased brand marketing and freight expenses. These factors somewhat weighed on adjusted operating income in both segments during the fourth quarter of fiscal 2018. Persistence of these factors is a threat. Apart from McCormick, many other food companies like Campbell Soup CPB, General Mills GIS and TreeHouse Foods THS are bearing the brunt of cost-related hurdles.

McCormick is also exposed to currency headwinds, which dented its top and bottom lines in the last reported quarter. Also, management expects currency movements to have a 2% adverse impact on net sales, adjusted operating income and the bottom line in fiscal 2019. Clearly, volatility in exchange rates and persistence of high costs are threats to the company’s upcoming quarterly results.

Nonetheless, we commend McCormick’s focus on its Comprehensive Continuous Improvement (CCI) program. The CCI program has helped the company focus better on reducing costs and enhance productivity. Cost savings reached a record of $118 million in fiscal 2018 on the back of CCI and streamlining initiatives. This also provided some cushion to the company’s gross and adjusted operating income margins during the fourth quarter of fiscal 2018. McCormick expects to achieve cost savings worth $110 million in fiscal 2019, which should help it offset the aforementioned challenges in the upcoming quarters.

What the Zacks Model Unveils

Our proven model shows that McCormick is likely to beat bottom-line estimates this quarter.  For this to happen, the stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

McCormick currently carries a Zacks Rank #3, which along with an Earnings ESP of +2.80% makes us reasonably confident of an earnings beat.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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