McCormick (MKC) delivered Q3 adjusted EPS of $1.12, an 8.7% increase from last year, and above consensus expectation of $1.03. Better yet, MKC raised guidance range from $4.05-$4.13 to $4.20-$4.24. The bottom of the new range is above all street estimates. The acquisition of Reckitt Benckiser’s (Frank’s hot sauce) has been more accretive than expected. MKC is up 5% on the positive news.
Current Price: $101.4 Price Target: $107 (unchanged)
Position Size: 2.15% YTD Performance: 8.8%
Thesis Intact. Key takeaways from the quarter:
1. Top line: sales results were 9%, with organic growth 7%
a. Consumer segment up 5% with organic growth of 4% and sales in America +7%
b. Industrial segment: +14%. Double-digit growth in the US, and Giotti acquisition (EMEA region)
2. Margins: adjusted operating income grew +9% (ex-FX). Gross margins were impacted by the timing of pricing action during the quarter, but sales leverage impacted operating margins positively (lower SG&A).
a. Consumer segment adjusted operating segment +7% thanks to higher sales leverage and cost savings initiative
b. Industrial segment margins grew 13% thanks to cost savings and mix towards higher margin products
3. 2017 guidance raised
a. Reiterated sales growth target of 9-10% ex-FX
b. Operating margins increase slightly
c. EPS growth of 11-12% ex FX, reaching $4.20-4.24 on an adjusted basis
4. Valuation: we are not changing our price target.
a. MKC offers a current run-rate real cash yield of ~4%: 2% dividend yield + 2% buyback yield.
b. MKC has returned 2/3 of its cash to shareholder in 2016
The Thesis on MKC:
• Industry Leader: McCormick & Company (MKC) is a leading manufacturer of spices and flavorings. MKC has been in business for 120 years and the founding family still has ownership interest
• Growth opportunity: Spice consumption is growing 3 times faster than population growth. With the leading branded and private label position, MKC stands to be the biggest beneficiary of this global trend
• Offense/Defense: MKC supplies spices to major food companies including PepsiCo and YUM! Brands giving it a blend of cyclical and counter-cyclical exposure
• Balance sheet and cash flow strength offer opportunities for continued consolidation through M&A in the sector