Key Takeaways:
· Consumer segment saw good growth this quarter on pantry loading, and demand is expected to continue
· Food away-from-home category (20% of sales) impacted by restaurants/food services closed, and recovery will be difficult in 2020
· Margins higher on mix and cost cutting
· Raising our price target on better consumer trends expected for the rest of the year
Current Price: $177 Price Target: NEW $191 (prior $162)
Position size: 3% 1-Year Performance: +17%
McCormick reported results better than expected, with sales up 9.6% ex-FX thanks to its consumer segment (+26%), offsetting weakness in its flavor solutions segment (-18.5% due to struggling restaurants/food service). This quarter includes the initial pantry loading in the Americas and EMEA, and replenishment in China. The shift to at-home consumption continued throughout the quarter, and is expected to see incremental demand throughout the year. Although the company is still not providing a 2020 guidance, it reaffirmed its long-term goals and gave some expectations around demand in its 2 segments. The management team believes the packaged food companies will return to pre-crisis levels, while food away from home – 20% of sales – will experience a harder time bouncing back. Consumers will continue to cook more from home in 2H2020 per their expectations. As noted last quarter, MKC is reducing some expenses and delaying some programs, which resulted in a 210bps increase in its operating margin, on top of the higher margin Consumer segment growing faster that its lower margin Flavor Solution business. We are raising the price target to account for better results than expected and lower discount rate in our DCF. The stock is up +56% since it bottomed in March this year.
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