CAG ConAgra Brands Inc

McCormick & Co. Inc. (MKC) is scheduled to announce its fourth quarter and fiscal year 2011 results on January 26, 2012 and we don’t see any major estimate revisions at this point. Currently, the Zacks Consensus Estimate for the fourth quarter is 97 cents per share and $2.78 per share for the fiscal year 2011.

Third Quarter Overview

McCormick’s third-quarter 2011 operating earnings of 69 cents a share surpassed the Zacks Consensus Estimate by 6.2%. However, the reported quarter’s earnings lagged the year-ago earnings by 9.2%.

The quarterly earnings benefited from favorable operating income and cost savings. Moreover, new products, increased distribution and brand marketing were able to offset business weaknesses.

Total revenue grew 16% year over year to $920.4 million from the year-earlier quarter, benefiting from McCormick’s favorable volume, product mix and pricing actions which have effectively curtailed increased raw and packaging material costs. Revenue also exceeded the Zacks Consensus Estimate of $870 million.

For fiscal year 2011, management reaffirmed its earnings per share guidance in the range of $2.74 to $2.79, including the impact of the acquisitions and the joint venture. Sales are expected to grow 6% to 8% in local currency, with the impact of sales from favorable currency exchange rates at 2%.

Agreement with Analysts

The analysts expect McCormick to follow the trend of beating its earnings estimates, as it has been doing for the last four quarters. Though the analysts have not revised their estimates in the last one month for the current quarter and fiscal year 2011, there is a slight downside trend in the fiscal year 2012, which justifies a neutral sentiment on the stock.

Out of the 13 analysts providing estimates for the current year, none of the analysts changed their estimates on the stock. However, only one of the 14 analysts downgraded his estimate over the last 30 days for the fiscal year 2012. It means that analysts are neutral about the long-term performance of McCormick.

The trend indicates no clear directional movement for the upcoming quarters and signifies that the analysts are circumspect about the long-term trend earnings of the company.

Management believes that McCormick has strong operating income, and is trying to save on increasing costs.

Magnitude of Estimate Revisions

Over the past 30 days, the estimates for McCormick remained unchanged at 97 cents for the current quarter and at 61 cents for the first quarter of 2012. The estimates also remain unmoved for fiscal year 2011 at $2.78 per share and for fiscal 2012 at $3.10 per share.

McCormick has a significant presence in the international market. The company’s consumer brands reach approximately 100 countries. The significant international presence has boosted its growth, and we believe will continue doing so in the coming years.

In addition, McCormick has made multiple acquisitions that have contributed to growth. On September 12, McCormick consummated its joint venture with Kohinoor Foods Ltd. India, to market and sell basmati rice and food products in India. The venture was announced in June 2011 and will now be named as Kohinoor Specialty Foods India Private Ltd.

McCormick had invested INR 5.2 billion ($113 million) in the deal and commands an 85% interest in Kohinoor Specialty Foods India Private Ltd. Going ahead, McCormick is also expected to bear approximately $4 million of fees and other costs in the fourth quarter of 2011 related to the deal, which would reduce earnings by 3 cents per share.

However, McCormick expects the joint venture sales to be approximately $85 million in the first year, and will be accretive to McCormick’s earnings per share in 2012.

McCormick also sealed the deal to acquire Kamis S.A., which is a leader of spices, seasonings and mustard in Poland. McCormick said it will record about $3 million by way of fees and other costs related to the completion of the deal in the fourth quarter of 2011, which is expected to reduce earnings by 2 cents per share. In addition, McCormick expects the business to add about 6 cents per share to the earnings of 2012.

Though the company has completed multiple acquisitions that have expanded its product portfolio, we believe that such a strategy has inherent risks. Additionally, the competitive nature of McCormick's market is a matter of concern.

Recently, McCormick has raised its dividend by 3 cents to 31 cents a share in order to return value to its shareholders.

The new dividend was paid on January 13, 2012, to shareholders of record at the close of business on December 30, 2011. McCormick, a global leader in flavor, has successively increased its dividend 26 times.

McCormick, which competes with ConAgra Foods, Inc. (CAG) and Kraft Foods Inc. (KFT), currently holds a Zacks #4 Rank translating into a short-term ‘Sell’ rating. Over the long term, we provide a Neutral recommendation on the stock.

 
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