Key Takeaways:
Current Price: $96 Price Target: $108 (NEW)
Position size: 2.39% 1-Year Performance: +3%
- Revenue growth of +10.2% came above expectations
- Growth driven by volume and pricing in both segments
- Consumer sales +9.2% y/y, pricing helping +2.5%, volume/mix added +4.8%
- Continued preference for cooking more at home.
- Gaining market shares
- Recent acquisition is also helping growth (Cholula brand) +1.9%
- Flavor Solutions: +12.1% – acquisitions added 7.3% to top line; price & volume added 2.3% and 2.5%
- Gross margins were down 150bps y/y due to continued cost inflation, but that was better than street expectations. Operating margin down 80bps y/y
- Cost inflation & logistics challenges had a bigger impact on margins than sales leverage and cost savings actions
- ERP investments is offset by lower COVID-19 related costs
- Started phasing in pricing actions
- Lower brand marketing spending is helping SG&A spending
- Guidance for the year is better than expected.
- Sales growth of 3-5% (FX has a -1% impact)
- Additional pricing actions to start in Q2
- Gross margins down 50bps to flat
- operating income +8% to +10%
- EPS $3.17-$3.22, above consensus of $3.09
- Long-term thesis is intact. We see the inflation situation and pressure on margin as a temporary impact, as the company will continue to raise prices to offset increased costs
- CEO quote:
- Demand: “he demand for flavor is not cyclical or […] pandemic related, but is undergirded by real demographics […] fueling that demand and we think that the […] shifted consumption at home that has happened in recent years is just a continuation of a long-term trend that supports our business from an underlying standpoint and all the things that we do on our strategies for brand building […] continue to be supportive of growth. “
- Pricing action: “for the volume impact at a total company level to be more flattish to low-single-digit decline. We have modeled in elasticity, but not as the rates that we’ve seen historically. I do think that we’re new and uncharted territory versus all of the elasticity models. At least from the actions that we’ve taken so far. […]. And that’s what we seem to be experiencing. If anything we may be seeing slightly even less elasticity than we’ve assumed“.
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