Key Takeaways:
· FY20 guidance withdrawn, update should be done in June 2020 at the next earnings call
· COVID-19 in China to have a negative impact on FY20 sales of 1-2%
· More cooking at home and increased demand from packaged food companies, offset by decrease in demand from restaurants and food service sector
· ERP system upgrade & some business transformation projects have been delayed (we mentioned this possibility in our debt level analysis earlier)
Current Price: $141 Price Target: $162 (NEW – to reflect lower 2020 results)
Position size: 2.81% 1-Year Performance: -7%
McCormick released its 1Q FY20 earnings results this morning. Organic sales were down -1.4% in the quarter, due to a ~28% decline in China’s Consumer segment. EPS declined 4%. As expected, the COVID-19 impact is being felt in their restaurant and food service end markets, while “cooking at home” and packaged food companies have seen an uptick in demand (pantry stocking). Because each regions MKC serves sees a different mix of end-markets and confinement orders, they cautioned investors from generalizing the sales drop in China in Q1 to the rest of the world for next quarter. The outbreak in China reduced sales by 3% and adjusted operating income by 10% in Q1, but China is less than 9% of company revenue, while away-from-home categories comprise 20%. The management team also withdrew its guidance for the year. As we thought they would, MKC is delaying some of its ERP implementation and business transformation. There is enough liquidity to fund current operations and financial needs so we believe the dividend is not at risk. The long-term thesis is still valid for MKC, even if near-term drivers to the business have shifted due to the coronavirus. We updated our price target to reflect a lower 2020 performance.
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]
[category earnings]
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109