Key Takeaways:
Current Price: $146 Price Target: $129 (under review)
Position size: 2.86% 1-Year Performance: +37%
McCormick released its 1Q19 results and reiterated their initial 2019 guidance. Organic growth is back on track (+4% organic) after the 4Q18 shortfall due to inventory issues. High volume in both Consumers and Flavor Solutions drove the sales growth this quarter. Retailers orders were supported by higher customer consumption, and increased sales to quick service restaurants helped the Flavor Solutions segment. Revenue growth is better than most food competitors, which continues to explain MKC’s premium valuation. Recent successful acquisitions (French’s mustard and RedHot sauce for example) as well as the introduction of new products are helping sustain good top line growth. Overall this quarter was pretty uneventful and continues to show why we own this stock: steady, reliable growth supported by good underlying demand for their products. Our price target is under review.
.
1Q19 results:
Overall sales +4% (ex-FX):
ü Consumers: +2.7% growth ex-FX.
ü Flavor solutions: +6.4% ex-FX. Higher sales to quick service restaurants in the US and Asia
Gross margins and adjusted operating margins were up 40 bps y/y
EPS grew +12% y/y, thanks to lower taxes
Cash conversion cycle continues to improve, down 4 days (a sign of good management’s skills)
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 of $110M
· Adjusted operating income to grow +9-11% (ex-FX)
· Tax rate 22%
· EPS $5.17-5.27, 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