Key Takeaways:
Current Price: $123.8 Price Target: $129 NEW (from $131 in September)
Position size: 2.96% 1-Year Performance: +23.7%
McCormick released its 4Q18 results and 2019 guidance that are both disappointing vs. consensus. 4Q18 sales ended up 3% below expectations as they were impacted by two events causing a 3% hit to sales in its Consumer Americas business: 1/ some key customers reduced their inventory levels during the quarter, an odd timing per McCormick as the Holiday season usually sees good demand; 2/ a large customer had a change in its internal store replenishment system that caused re-ordering issues. On the positive side, the management team insisted during the call that consumption trends are still strong. Operating margins declined 70bps, were below as well impacted by lower sales and higher raw material costs. Free cash flow was favorably impacted by better working capital management (see chart below) and lower capex.
We are updating our price target slightly down to $129 after including the new 2019 guidance numbers in our model. Our long-term view on MKC is unchanged and we maintain it as a core holding in our consumer staples portfolio.
4Q18 results:
Overall sales +2% (ex-FX): strong US consumption was offset by the inventory reductions
ü Consumers: +1.8% growth ex-FX. Good growth in Europe and China
ü Flavor solutions: +2.8% ex-FX. Higher sales to quick service restaurants in the US and Asia
Margins impacted by unfavorable product mix, freight costs and increase in marketing and ERP costs
EPS grew +8% y/y
Initial 2019 guidance:
· Organic sales growth ex-FX +3-5%, currency to have a -2% impact
o Growth drivers: marketing, expanded distribution, new products, customer intimacy
· Raw material costs to increase low-single-digits
· Cost savings initiatives to help +110bps
· Adjusted operating income to grow +9-11% (ex-FX)
· Tax rate 22% (prior was 25-26%)
· EPS $5.17-5.27 (below consensus of $5.40), growth +6-8% ex-FX
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
$US.MKC
[tag MKC]
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109