Key Takeaways:
Current Price: $167 Price Target: $174 (NEW)
Position size: 2.80% 1-Year Performance: +26%
McCormick released 3Q EPS that beat expectations with sales +2.2% (ex-FX), thanks to positive volume/mix in its Consumer segment: sales were +4%. Consumer operating margins expanded 250bps y/y, leading adjusted consolidated margins higher 160bps y/y. Their Flavor Solutions segment proved once more to be volatile quarter-to-quarter as sales were down 0.4%. The company had a warehouse transition to support its future growth which had a negative impact on sales as well. The management team raised the EPS guidance for the year to $5.30-$5.35 from $5.20-$5.30 but this is mostly driven by lower taxes as sales growth (ex-FX) was narrowed down to 3-4% from 3.5% and operating income from 8-10% to 8-9%. As the reduction in leverage is ahead of schedule, MKC announced being on the hunt for companies to acquire. The company is also expecting to spend more in advertising in the fourth quarter, an important season for the company with the Holidays and home cooking. While the quarter was good, we think the stock is reacting very well today (+7%) as the management team highlighted during the call that the growth in the private label category recently moderated significantly. The competition from private labels has been strong in the past years, so we see this as a good explanation for today’s move back to prior trading levels the stock reached this summer (the stock had been weak after a sell-side analyst downgrade in August). We are updating our price target to $174.
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