MKC reported an EPS results a penny above consensus, despite a boost from lower taxes of $0.08, which explains the stock’s negative reaction to results this morning. The long term story is intact, highlighted by its overall organic growth rate this quarter of 4%, thanks to +3.5% from volume/mix and +0.5% from price (reported revenue up +13.5% the recent RB Foods brands acquisition that added 9.6%) and healthy gross margins (+280bps). EBIT margins declined 200bps y/y and missed expectations by 80bps due to additional marketing/promotional spending. Overall adjusted operating margin increased 80bps y/y thanks to RB Foods brands accretive addition and core business shift to more value-added products. The Consumer segment showed results below expectations, while its Flavors segment was strong.
Overall McCormick has been a strong contributor, outperforming the consumer staples index by 33% in the last year. We are raising price target to $131 from $117.
2018 guidance:
· Sales growth ex-FX reaffirmed
· Adjusted operating margin top end lowered from 22-24% to 22-23% (ex-FX)
· Tax rate lowered to 21% (from 23%)
· EPS raised from $4.85-$4.95 to $4.95-$5.00 on a lower tax rate
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
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