Key Takeaways:
Last week McCormick released its 2Q18 earnings, with a sales and gross margin beat (+340bps y/y à leading to a 330bps operating margin expansion) and EPS +24% y/y. Revenue ex-FX grew 16% (+13% from the addition of Frank’s and French’s brands), driven by +2.5% volume/mix and 0.5% price. China had the strongest Consumer segment growth with +5.7% volume growth. In its Flavor segment, Americas was the leading geography with +5.3% volume growth. The addition of new brands helped expand the company’s overall margins. MKC reduced its cash conversion cycle by 9 days, a sign of good cash flow management skills, supporting faster debt pay down.
2H18 guidance:
Ø Strong grilling season ahead, followed by an increase in brand marketing supporting the fall and upcoming holiday season.
Ø Frank’s and French’s momentum should continue (distributors added in 14 new countries)
Ø Positive pricing
Ø New product growth
Ø Expanded distribution
In the consumer staples sector that has recently struggled with top line growth, MKC is the exception, guiding to 2018 sales growth of 13-15% (including 8% from new brands acquired). Cost inflation is also manageable (low single digits) thus not impacting operating margin expansion. On the valuation front, MKC looks fairly valued, but we like the category it plays in, with good growth potential and a strong management team focused on shareholders returns.
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
[tag MKC]
$MKC.US
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
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