McCormick (NYSE:MKC) stock dropped in the immediate wake of a fourth-quarter earnings report that left many investors wanting more. Shareholders are still looking at robust gains after the fall, with the stock up 23% in the past year compared to a 7% drop in the S&P 500.
Still, investors seemed to focus all of their attention on McCormick's conservative outlook for fiscal 2019, which called for sales growth to land at between 1% and 3% compared to last year's 12% spike. But that forecast isn't as bad as it might seem at a glance, and the spicing and flavorings specialist had some other good news for investors, too.
Strong full-year results
McCormick came in just shy of Wall Street's expectations in the fourth quarter, with its 2% sales increase marking a slowdown from the 4% rate that investors have seen in each of the last few quarters. Management pinned the blame mostly on inventory cuts by big retailers. These moves appeared to stall the positive momentum McCormick had enjoyed in the prior quarter. Rather than accelerating, its core flavorings and spices business slowed modestly.
It will be worth watching whether the demand picture worsens over the next few quarters, or if this quarter's dip is just part of natural short-term volatility. The bigger picture is decidedly positive, though. Highlights of McCormick's 2018 fiscal year included a double-digit sales increase, rising gross and operating profit margins, and a 17% spike in adjusted earnings. Its portfolio gained scale and tilted further toward premium condiments with the addition of the French's and Frank's franchises. "We successfully completed the integration of these brands in 2018," CEO Lawrence Kurzius summarized in a press release, "and have created value, achieved synergies and obtained results according to our plan."
Record cash flow
The company achieved its seventh straight year of record operating cash flow as that metric rose to $821 million from $815 million. That financial success helped fund the recent 10% increase to McCormick's dividend.
Investors should be even happier about the fact that robust cash flow is helping management quickly drive down the company's debt. The company allocated $545 million to that end in 2018, even as adjusted earnings spiked higher. As a result, McCormick's leverage ratio fell to 4 times annual earnings compared to 5 just a year ago. That keeps management on track to knock leverage down to 3 times adjusted earnings by 2020, at which point the company can resume the stock repurchase spending it suspended as part of its $4 billion French's and Frank's acquisition.
McCormick's 2019 outlook isn't as bad as some investors might think. The main reason for the sales growth slowdown, from 12% down to 2%, is the fact that its newly acquired brands are now fully integrated into the business. Strip out the impact from purchases -- and from currency exchange rates -- and sales gains should hold steady or even accelerate this year.
Kurzius and his team are targeting organic gains of between 3% and 5%, in fact, compared to about 3% in 2018. Profitability is expected to improve again, too, with adjusted operating income rising by about 10%.
Overall, these projections don't change the bigger-picture trends that have allowed McCormick to post faster sales growth and rising profit margins that make it stand out from the broader packaged foods industry. Thus, investors who have been waiting for a better price to snap up shares of the spice and flavorings giant might want to take advantage of the recent stock decline.