On March 20 I wrote about McCormick & Company's (MKC 0.66%) strong business and the returns it has piled up for investors. On March 25, McCormick announced it had beaten earnings estimates, and investors again cheered as the stock rose over 5% that day.
What was behind McCormick's excellent first quarter? And what does it mean for the rest of the year and beyond?
The good
McCormick beat analysts' earnings estimates by nearly 7%, with actual earnings coming in at $0.62 for the quarter compared to estimates of $0.58.
McCormick blew past analysts' estimates with a fine mixture of higher revenues and higher margins than in the first quarter of the previous year. The company had higher than expected sales of $993 million, which is about 6% higher than the same period last year. Looking from an efficiency standpoint, operating margin rose 4.2% to 12.5% this quarter from the same period a year ago.
The higher revenues and higher margins contributed to operating income and earnings per share gaining 11% and 9%, respectively, from a year ago.
The reason
You do not typically expect to see high growth out of a company that sells the same product -- spices, in this case -- it did years and years ago, so how did McCormick pull this off?
First off, half of the sales increase was attributed to McCormick's acquisition of Wuhan Asia-Pacific Condiments Co. Ltd., or WAPC, for short. McCormick acquired WAPC in 2013 to help build its geographic reach further into China. McCormick already had a foot in the door of the coastal areas of China, so the acquisition of WAPC, a company that sells two bouillon brands, got McCormick into the central region of China.
The other half of the sales growth was internally generated, with strong sales outside of the United States, particularly in the company's Industrial Business segment, which sells to food manufacturers and restaurants. The industrial business segment in the Europe, Middle East, and Africa region grew sales by 12% in local currency, but 8% growth was reported because of currency effects.
The company's growth in margins could be attributed to its Comprehensive Continuous Improvement initiative, which strives to make the company more cost efficient and give it higher cash flow. Increased operating margin in the industrial business segment in particular helped that segment post a 24% increase in operating income.
The future
During the first-quarter earnings release, management reaffirmed guidance for the entire fiscal year. They expect sales to increase 3%-5% this year over last year in local currencies. Currency effects have management expecting a 1% decrease in reported sales this year.
Further, management expects earnings per share of $3.22 to $3.29. This represents a 10% increase over last year on the low end of the estimate. This also gives us a price to future earnings of around 22 times, based on the company's current stock price.
The Comprehensive Continuous Improvement initiative mentioned earlier is estimated to cut costs by $45 million this year, and management is planning to use $25 million of that in a marketing campaign to ramp up sales of new brands.
Foolish bottom line
McCormick had a great first quarter to start the year off right. The company is very well run, demonstrated by its use of strategic acquisitions that are adding to its top and bottom lines. Another example would be its Comprehensive Continuous Improvement initiative; management actually made a program, named it, and set specific goals that investors can see and monitor.
The market currently likes this company, valuing its shares at over 24 times earnings, compared to the market average of 18 times. As I said in my previous article, though, McCormick is an excellent company that any investor should love to own a piece of in his portfolio.
