McCormick (MKC 0.66%), the leading global spice company, is scheduled to report third-quarter results before the market opens Sept. 26. The usually steady stock has recovered nicely since a disappointing fourth-quarter report in late January caused an uncharacteristic drop; shares reached an all-time high of $171.10 last month before a J.P. Morgan downgrade Aug. 20 spurred a pullback. The dividend aristocrat now lags the S&P 500 year-to-date as it approaches the final quarter of the year.
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Second-quarter review: Turning up the heat?
McCormick investors are hoping the stock recaptures the momentum that was triggered by its second-quarter earnings report, which posted modest sales growth of 3% supported by healthy demand for its core products and higher pricing. Cost-cutting initiatives helped adjusted operating profits rise 5%, though unfavorable foreign currency translation capped income growth.
The company expects 3% to 5% sales growth for fiscal 2019 on a constant currency basis. Management reduced its forecast for growth in operating income to 8% to 10% from 10% to 12%, but upwardly revised its adjusted EPS forecast, to $5.20 to $5.30 from $5.17 to $5.27. This represents expected bottom-line growth of 7% to 9%. The stock price moved higher on the news, with investors choosing to see the spice jar as half-full thanks to the company's robust cash flow, increasing margins, and higher potential EPS. Management is anticipating strong sales performance in the back half of 2019, particularly during the holiday period.
Product innovation, Generation Z are growth catalysts
Management carried its upbeat tone into the Sept. 4 Barclays Global Consumer Staples Conference, where they highlighted a focus on growth as they work to build the McCormick of the future. This company is the clear industry leader, with a 20% global market share in the spices and seasonings category. Its 250 brands, which encompass more than 16,000 products, generated $5.3 billion in 2018 sales. Products like the recently acquired Frank's Red Hot sauce and French's mustard will likely be profitable assets for years to come. The next wave of growth, however, is expected to come from new product development.
McCormick has a strong list of new creations in the pipeline. Its innovation plans are centered around health and wellness trends, and its mix is shifting toward flavorful, healthy products. McCormick now has a wide range of natural and organic offerings and has relaunched its Flavor Real platform featuring non-GMO, better-for-you products.
It is also very much in tune with the tastes of the ethnically diverse Generation Z market, which tends to have a more global palate and demand for convenience. The company views this demographic as a key growth market and is responding with popular items like street taco mixes and "heat-and-eat" meals.
Enhanced digital capabilities should augment sales
Though McCormick is a 130-year old consumer-staples company, management has shown they're not afraid to employ technology to improve the business model. Earlier this year, they entered into a partnership with IBM to boost their artificial intelligence capabilities surrounding new product development. The company also has a growing online presence through the recent launch of McCormick Shop in the United States and an expanding partnership with China's TMALL. Global e-commerce sales rose by 43% in the first half of 2019 and will likely continue to see success.
China is one of the company's largest international markets; along with other developing countries, this is a key area of focus for future company growth. These regions already represent approximately 20% of McCormick's overall revenue, and there remains plenty of room for further international expansion.
In Q3, look for worldwide consumer appetite for new products
With an increased earnings forecast for fiscal 2019, the bar has been set high for McCormick, and investors will be closely scrutinizing third-quarter results to see whether management's bullish outlook has shifted. Any signs of muted enthusiasm could send the shares back toward late-June levels. On the other hand, signals of new product adoption and international sales traction that validate McCormick's growth plans could catapult the stock to a fresh record high.
At nearly 27 times forward earnings, shares are trading at a premium valuation relative to McCormick's packaged-food peers. Although this valuation is likely warranted due to the company's strong fundamentals, brand power, and stability, it may take an unexpected success for this third-quarter report to move the needle.
