McCormick & Company, Inc: Still on Fire

McCormick & Company beat first-quarter earnings estimates and looks to keep growing.

Mar 31, 2014 at 2:09PM

On March 20 I wrote about McCormick & Company's (NYSE:MKC) 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.

Three stocks to own for the rest of your life
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has allowed us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Jacob Meredith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information