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McCormick (MKC) Up 8.4% 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 8.4% 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 its most recent earnings report in order to get a better handle on the important catalysts.

McCormick Q2 Earnings Beat Estimates, Sales up

McCormick posted robust second-quarter fiscal 2020 results, with the top and the bottom line surpassing the Zacks Consensus Estimate. Moreover, earnings and sales increased on a year-over-year basis. Given the current situation related to the coronavirus outbreak and its unpredictable impact on consumer demand globally, the company refrained from providing fiscal 2020 guidance.

Quarter in Detail

Adjusted earnings of $1.47 per share increased 26.7% on a year-over-year basis, on the back of higher adjusted operating income along with reduced interest expense. Moreover, the metric surpassed the Zacks Consensus Estimate of $1.16 per share.

This global leader of flavors and spices generated sales of $1,401.1 million, up 7.6% year over year and including currency headwinds of 2%. On a constant-currency (cc) basis, sales increased 9.6%. Sales in the quarter were driven by major growth in the consumer segment. Also, sales in the quarter surpassed the Zacks Consensus Estimate of $1,381 million.

Gross margin expanded 230 basis points (bps) to 41.4% on favorable product mix as well as savings from the Comprehensive Continuous Improvement (CCI) program.

Adjusted operating income rallied 21% to $260 million and 23% at cc. Further, the adjusted operating margin expanded210 bps to 18.6%.

Segment Details

Consumer Business: Sales increased 26% to $962.6 million on the back of strength in the Americas and EMEA regions. Sales in the Americas surged 36% due to broad based growth across its portfolio as well as favorable pricing action. In the EMEA region, sales increased 22%. However, sales in the Asia-Pacific region declined 18% due to adverse impact from the COVID-19 outbreak in China.

Flavor Solutions: Sales in the segment fell 18% from the prior-year quarter’s figure to $438.5 million, thanks to weakness across all regions. Sales in the Americas declined 15% due to major decline in sales to branded foodservice consumers as well as quick service restaurant customers. Sales in the EMEA region dropped 34% year over year. Sales in the Asia-Pacific region declined 11% due to coronavirus-induced restrictions across countries other than China.

Financial Update

McCormick exited the quarter with cash and cash equivalents of $185 million, long-term debt of $4,113.6 million and total shareholders’ equity of $3,662.3 million. For six months ended May 31, net cash provided by operating activities was $355.5 million.

Outlook

In the consumer segment, the company is anticipating an overall increase in consumer demand during periods of greater cooking at home. For its flavor segment, McCormick expects demand from packaged food companies to same as the pre COVID-19 levels. Moreover, the company is expecting demand from restaurant and other foodservice customers to gradually recover as coronavirus induced bans are being lifted in the second half of fiscal 2020. Also, the McCormick’s long-term financial objectives as well as capital allocation plans remain the same.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 7.56% due to these changes.

VGM Scores

Currently, McCormick has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 B. 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 these revisions looks promising. Notably, McCormick has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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