Investors have high expectations for the third quarter earnings results that McCormick & Company (MKC -3.05%) will announce before the market opens on Thursday, Sept. 27. The spice and flavorings giant recently integrated $600 million of new, more profitable sales from a major franchise acquisition. Those acquired gains are combining with steady growth in its core portfolio to supercharge revenue and earnings growth.
With that bigger picture in mind, let's look at what McCormick might reveal in its upcoming earnings report.
On average, analysts expect McCormick's third quarter sales to rise by 15% to $1.36 billion. That top-line result would keep revenue expanding at about the same rate as in recent quarters, but it won't tell the whole story on growth. At a more detailed level, investors are looking for healthy demand in the core business and in the newly acquired French's and Frank's condiment portfolio that McCormick purchased for just over $4 billion last year.
In the second quarter, McCormick posted modest sales growth of between 2% and 3% in its core divisions of consumer spices and flavorings. Add in the extra sales from the acquired brands, and overall revenue jumped 16%, excluding the effect of foreign currency shifts.
Executives said back in late June that they were happy with the performance of their core business. CEO Lawrence Kurzius and his team are also excited about the value they've been able to add to the French's and Frank's brands, mainly by giving them wider, more prominent distribution. If that momentum held up, then investors should see positive contributions from each of McCormick's business lines this quarter.
A key factor behind McCormick's recent market-thumping stock performance has been its rising profitability. At a time when many consumer packaged-foods companies are facing margin pressure, the spice giant is successfully raising prices, which supports management's argument that the flavorings industry is a particularly attractive food niche.
McCormick is also benefiting from aggressive cost cuts and a tilt in the sales base toward condiments with higher margins than many of its traditional flavorings. As a result, management expects full-year earnings growth to modestly outpace the 13% to 15% sales increase it is targeting. Specifically, McCormick believes adjusted earnings will land between $4.85 and $4.95 per share for fiscal 2018, translating to growth between 14% and 16%.
McCormick's capital allocation priorities have shifted due to the $4 billion of debt it took on to pay for its condiment acquisition. The company remains a solid dividend payer, with its most recent 11% payout hike marking its 32nd consecutive year of annual raises.
But that dividend isn't being supplemented by stock repurchases, since McCormick needs to pay down its debt to a more manageable level. Shareholders can expect McCormick to continue prioritizing debt reduction over share repurchases until the company reaches its target leverage ratio between 1.5 and 1.8 times adjusted earnings. That ratio passed 5 last year, but is heading lower thanks to the combination of increased profitability and debt repayments. Ideally, positive earnings trends will make it easier for McCormick to quickly reduce its debt, so that management can more freely direct excess cash back to shareholders in the years ahead.