Investors are expecting mostly good news from spice and flavorings giant McCormick (MKC +0.62%) in its upcoming earnings report. The stock has rallied from modest losses early in the year thanks to signs of stable sales growth and improving profitability.
Those operating and financial wins have been modest so far in 2019, though, which has contributed to lingering questions about whether McCormick can quickly return to its long-term growth targets by 2020, as management has predicted.
CEO Lawrence Kurzius and his team have an opportunity to clear up some of those worries while updating their outlook when McCormick posts earnings results on Tuesday, Oct. 1. Here's what investors will be watching in that announcement.
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What level of growth?
McCormick revealed mostly good news about global demand trends last quarter, with organic sales rising 3% after adjusting for currency exchange shifts. That result was at the low end of management's guidance range, but investors were happy to hear that organic growth was powered by higher sales volumes even as prices inched up. That balanced expansion sets McCormick apart from most other packaged foods giants, including snack specialists like General Mills (GIS 1.69%), which are relying on higher prices to deliver all their growth these days.
In addition to another quarter of robust volume gains, investors will be looking for McCormick to post slightly faster overall growth. Last quarter's 3% uptick was held back by a slow start to the grilling season, management said in early July, and so a shift in spice demand should help lift sales closer to 5%.
Margin trade-offs
A key assumption supporting the investment thesis for McCormick is that its dominant hold on an attractive industry niche will translate into higher earnings growth than that experienced by peers in the consumer staples industry. Management has several initiatives aimed at strengthening this part of the business, including cost-cutting programs, innovative product launches, and partnerships with retailing giants.
Success on all these scores should show up in changes to McCormick's operating margin, which rose 0.8 percentage points last quarter to 16.5% of sales. More improvements are likely as the company continues squeezing efficiency out of its large global footprint and as sales tilt more toward high-margin products like its French's and Frank's condiment brands. Conversely, the first hints of a deteriorating selling environment would likely show up in weaker margin results.
The outlook for 2019 and beyond
With the first three quarters of the year behind it, McCormick should have a good reading on whether or not the company can reach its 2019 growth objectives. Landing at the low end of management's 3% to 5% expansion target would constitute a modest disappointment given that McCormick aims to grow by between 4% and 6% over the long term. The earnings outlook is more clearly positive, with earnings likely to come in just shy of the company's long-term 10% expansion target.
It's not a big concern for investors that McCormick will probably undershoot its broader growth goals this year, considering it beat them by a wide margin in each of the prior two years. But shareholders will still want to hear management make bullish comments about future gains. They'll also want to start seeing concrete signs this week that the company can reaccelerate sales and profitability gains beginning in 2020.
