McCormick Earnings: Not So Spicy (MKC)

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It’s hard to believe that McCormick & Company (MKC) has been in business since 1889, but that explains the popularity and necessity of herbs and spices.

McCormick Earnings: Not So Spicy (MKC)You’ve certainly seen the McCormick spices in your grocery aisle and are familiar with the Lawrys brand, as well. You may not be as familiar with its other brands — Club House, Zatarain’s, Thai Kitchen, Simply Asia, Ducros, Schwartz, Kamis, Vahiné, DaQiao, Aeroplane, and Kohinoor — but they all form the backbone of this legacy spice provider.

Alas, things have been tough for MKC because tons of competition has come into the market over the past few years.

The big move into organics has lifted all the brands stocked at the health food stores, and farmer’s markets have increased substantially in popularity.

No longer can one only find seasoning at the grocery store.

While McCormick is a dependable dividend stock, there’s not much to like about MKC — especially after this latest batch of earnings.

McCormick Earnings for Q2

McCormick delivered second-quarter earnings of $84.3 million, or 65 cents per share, on revenues of $1 billion. About $13 million had to be backed out due to one-time charges, so non-GAAP earnings of 75 cents per share beat the consensus analyst estimate.

Currency bugaboos really hurt McCormick, taking its 5% sales growth down to negative 1% for the quarter, to $1.02 billion, missing expectations by a hair. The good news there is that MKC is seeing success internationally. On a constant-currency basis, McCormick said sales increased in the high single digits for China, and in double digits across Mexico, Eastern Europe and Russia.

On the other hand, some of these increases are the result of acquisitions. That’s not necessarily a bad thing, as I’m sure the acquisitions will pay for themselves and more over time. It also saves McCormick from having to reinvent the spice wheel and market a new product, when it can just buy into an established brand.

Still, it’s worth noting.

MKC also is looking to cut $85 million in expenses this year, and its operational cash flow is $186 million so far, which is nothing to scoff at. But there’s a lot of special charges hitting the bottom line as the result of these cost savings.

McCormick still thinks it can grow sales 4% to 6% in constant currency, which is very respectable, and currency hits are part of doing business, just as currency improvements are in different times.

As far as forecasts are concerned, MKC is aiming for $3.18 to $3.25 in EPS this year, and you can add back 29 cents in special charges if you want, so you get $3.47 to $3.54 to compare to last year’s $3.37.

But this is where the story for MKC gets kind of ugly.

McCormick dipped a bit today, dropping MKC stock to $79 … meaning it trades at 22 times fiscal 2015 estimates on pretty anemic EPS growth. (This is what drives me crazy about this market, too. Why on earth is MKC stock selling for twice what it should reasonably fetch?)

If there were something special about cash flow or the balance sheet, I might get more interested. All I see is $90 million in cash and $808 million in long-term debt.

McCormick’s longstanding dividend isn’t in any danger of giving up its impressive consecutive payout-hike streak — the company has increased its dividend for 29 straight years, and all told has paid out dividends uninterrupted for 91 years. Considering MKC pays out less than half of its income in dividends, you’ll keep getting your annual raises.

But why rush into this growth-lacking play when MKC stock yields just 2%?

That’s the insanity of this market. Don’t go near McCormick at this price — consider it a cue from insiders, who own less than 1% of this company.

Spice your portfolio with something else.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/mccormick-earnings-mkc-stock-q2/.

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