McCormick Lags; Reiterates Outlook - Analyst Blog
June 27 2012 - 11:45AM
Zacks
McCormick & Co. Inc. (MKC) delivered strong
second quarter 2012 earnings of 60 cents, which increased the
prior-year quarter earnings by 9% or 5 cents per share. The results
were driven by favorable operating income and tax rate, offset by
lower income from unconsolidated operations and higher interest
expense. Earnings in the quarter, however, lagged the Zacks
Consensus Estimate by a penny.
Sales and Margin Details
Total revenue in the quarter grew 11% year over year to $984
million. Revenue also exceeded the Zacks Consensus Estimate of
$968.0 million.
On a currency basis, revenue increased 13%, where half of the
increase was contributed by the acquisitions completed in 2011
(acquisition of Poland-based Kamis S.A. and Kitchen Basics, a
leading brand of liquid stock; and a joint venture with India-based
Kohinoor Foods Ltd.). McCormick’s price increase in response to
high input costs, volume and product mix also contributed to the
overall revenue growth.
Gross margins contracted 20 basis points to 39.5% in the
reported quarter, owing to material cost inflation. Operating
income increased 11% in the second quarter 2012 to $121.0 million,
driven by favorable impact of higher sales and cost savings under
the company’s Comprehensive Continuous Improvement (CCI) program.
However, the results were negatively impacted by a sharp rise in
material costs and a $4 million increase in brand marketing
expenses.
Segment Details
Consumer Business: Segment revenue surged 14%
year over year to $568.8 million in the reported quarter. On a
currency basis, revenue increased 15%, majorly driven by benefit
from acquisitions, and contribution from price increases,
favorable volume and product mix.
Like increase in revenues, operating income for the segment also
increased 15% to $88.6 million in the quarter, supported by
increases in brand marketing spending.
Industrial Business: Segment revenue climbed 8%
year over year to $415.2 million in the second quarter of 2012. On
a currency basis, segment revenue increased 10% attributable to
increased prices, favorable volume and product mix.
Operating income for the McCormick’s segment increased
marginally to $32.7 million from $32.3 million, mainly from
increased sales growth and higher CCI cost savings.
Capital Structure
The global leader in flavors, McCormick generated high inventory
at the end of May 31, 2012, due to higher material costs and
acquisitions, but declined from inventory on the balance sheet at
the end of the first quarter of 2012. Due to the seasonality of
McCormick’s business, cash flow from operations typically increased
significantly in the second half of the fiscal year.
Guidance
For fiscal 2012, McCormick continues to forecast a difficult
global economy and volatility in material costs. However, the
company expects to grow sales, generate cost savings, invest in
brand marketing support and deliver solid profit growth.
McCormick reiterates its sales guidance growth of 9% to 11%,
which includes an expected 4% tailwind from the acquisitions
completed in 2011. The company, however, expects foreign currency
exchange rates to lower sales growth by 2%. McCormick also
reaffirms its operating income growth of 9% to 11%, which includes
approximately $15 million of incremental brand marketing
support.
For fiscal year 2012, management re-affirmed its earnings
guidance in a range of $3.01 to $3.06 per share, reflecting the
higher operating income offset partially by lower income from
unconsolidated operations.
Our Recommendation
We are impressed by the company’s results in the second quarter.
Even though the company has completed multiple acquisitions and
expanded its product portfolio in 2011, we remain concerned with
the inherent risks involved. Additionally, we expect a tough
environment ahead with rising cost pressures.
McCormick which competes with ConAgra Foods,
Inc. (CAG) and Kraft Foods Inc. (KFT)
currently holds a Zacks #3 Rank (a short-term Hold rating). Over
the long term, we provide a Neutral recommendation on the
stock.
CONAGRA FOODS (CAG): Free Stock Analysis Report
KRAFT FOODS INC (KFT): Free Stock Analysis Report
MCCORMICK & CO (MKC): Free Stock Analysis Report
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