3M, McCormick, and Pfizer

In this episode of MarketFoolery, Mac Greer talks with Fool analyst Emily Flippen about some market news. McCormick (MKC 0.44%), 3M (MMM 0.41%), and Pfizer (PFE 0.23%) all fell on earnings. Emily explains some of the context behind the companies and their drops -- McCormick's acquisitions and growth, 3M's one-time fees, Pfizer's new plan, and more -- and how attractive they look going forward. Also, Emily shares her take on the U.S.-China trade war phase one deal and what investors might expect in the next few quarters, some things to keep in mind regarding the coronavirus and its potential impact on the Chinese economy, and more.

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This video was recorded on Jan. 28, 2020.

Mac Greer: It's Tuesday, January 28th. Welcome to MarketFoolery! I'm Mac Greer, and I am joined in studio by Motley Fool analyst Emily Flippen. Emily, how are you doing today?

Emily Flippen: I'm all right. How about yourself?

Greer: I'm doing good. I'm doing good. Now, in a minute, as our resident expert, as a student of China -- do you like when I always just kind of build your credentials up?

Flippen: [laughs] I love it.

Greer: Well, I'm going to have to ask you about the coronavirus.

Flippen: Of course.

Greer: Chris and Jason talked about it on yesterday's MarketFoolery, and I certainly want to talk to you about it in a few minutes. But I want to kick things off with some earnings stories. And let's begin with McCormick, the spice maker. And really a dang good stock over the last few years, but not so much today. Shares slipping a bit after McCormick reported lower than expected earnings. What is going on here?

Flippen: Well, not only did McCormick miss on their revenue and earnings, but they gave weak guidance for 2020. Net income was actually down $0.01 year over year on flat revenue. So, I think all in all -- I mean, McCormick's never been a high-flying stock, but it was a worse quarter than what was expected. But you need to put it in context. For instance, McCormick prior to this earnings was up 40% over the past year alone. And that is foiled against the market's 25%, but still, that's 15%, 20% over the market, which is extremely impressive for a company that has only grown revenue in the low-single-digits for a long time now.

Greer: That's a lot of Old Bay.

Flippen: It's a lot of Old Bay. And it might not be a high-flying company, but in constant currency terms, the company actually grew sales 3%. So, there were some headwinds in there that were a little bit out of their control. I think all in all, McCormick, ultimately what you're seeing is a strong, stable, dividend-paying company that has just been on a tear, and needs a little bit of a pullback, if you ask me.

Greer: And speaking of being on a tear, I think a lot of us, when we think McCormick, we think spices. But in recent years, they've gone on a bit of a buying spree where they bought food companies and food brands like Frank's Red Hot, French's. When I think mustard, I think French's. So, it's not just a spice maker anymore.

Flippen: Yeah, look, I have a bottle of Frank's Red Hot in my fridge constantly. I put that stuff on everything, to stick with their tag line there. So, McCormick is smart, because they're always looking forward and thinking, OK, well, if we see any softness in the spice market -- last year, there was some softness on the food service side of their spice division. So, yeah, when they see opportunities to acquire different brands, then they do that. And it's smart because it diversifies their revenue stream a little bit. And Frank's Red Hot is great.

Greer: Do you have a favorite spice?

Flippen: I like McCormick's premixed spices. I know it's a cop-out.

Greer: In the little paper bags?

Flippen: In the little paper bags. I know. I know. When I go home, I already have all those spices in my cabinet somewhere. But there's something so nice about just getting a little bag, putting it on the chicken, putting it on whatever, and then baking it and making it all easy enough.

Greer: I think there's no crime in that. I think you should just own it. You know what I love? And I'm such a late adopter, I feel like I came across this maybe 10, 15 years ago, but I'm such a huge fan of sea salt. And I know salt, I know the world --

Flippen: What's the difference?

Greer: I don't know, it just feels kind of chunkier. I don't know, it feels better. Now, I know the tide has been turning against salt for a while. And I know that too much salt, not a great thing. So, hold your emails. But, love me some sea salt. So, back to the stock. The stock has more than doubled over the last five years. Are you still bullish on McCormick going forward?

Flippen: I am. Their cash flow from operations were up 15% year over year. And in November, they authorized their 34th consecutive quarter of dividend increases. I think today's reaction might be a little bit of a needed pullback for the stock itself, but in terms of it as an investment, especially if you're looking for a dividend, it's a low dividend at about a 1.5% yield, but it's a good, stable player that generates a lot of cash flow.

Greer: And let's move on to 3M. Shares of 3M down around 4% on earnings. 3M also announcing that it is laying off 1,500 employees. That works out to around 1.5% of its workforce. Emily, what do you think?

Flippen: 3M had an interesting quarter. Their sales slightly missed. Their earnings missed big. They posted a gap EPS of $1.66 versus $2.10 expected. So, a big miss there. But there was a $0.49 headwind associated with, as you mentioned, the restructuring charges with that layoff of 1,500 people, a huge number of people, as well as litigation costs that don't expect to reoccur. So, on the bright side, it seems like they have some room for operational improvements throughout 2020. In fact, in 2020, they guided that the bottom line should rise more in the range of 2% to 7% thanks to those job cuts. It's never really a good thing you want to see with a company that needs to raise that income by laying off a huge number of people like this. But at the same time, they really do need to return to growth in 2020. Their sales were down 2% year over year.

Greer: And let's talk about another potential catalyst. Because back in October of 2018, 3M first warned that trade tensions with China would be a problem. Now, last week, we talked about phase one of the trade deal with China. We've got that now locked in. So, could that be a catalyst? I mean, it seems like things are getting better, and that can only help 3M, right?

Flippen: Every single time I think things are getting better the trade war, I need to knock on wood, because it seems like you take a step forward then two steps back. I really think it's too early to say whether or not we're going to see any further improvements in the trade war than the phase one deal. The phase one deal was the low-hanging fruit. There's a lot of very nitty-gritty details there that need to be worked out. And unfortunately, the safety and industrial segment for 3M is their largest revenue segment, and that's the most affected by the trade war.

Greer: Exit question: 10 years from now, will there still be Post-it Notes?

Flippen: 100%, just because David Gardner will still be in the world and he'll still be buying those Post-it Notes.

Greer: I love it, you're bullish on Post-it Notes.

Flippen: I'm bullish on Post-it Notes.

Greer: I love Post-it Notes, but I'm not sure with millennials -- I mean, you, as a millennial, I feel like it's all gone digital. So, I'm not sure. Five years from now, maybe so; 10 years from now, I think there's going to start to be a backlash against Post-it Notes because of the waste. And I love Post-it Notes.

Flippen: I also love Post-it Notes. If you go into my workspace at my home, I have Post-it Notes all over the place. I will admit, it's maybe not the most environmentally friendly thing I do.

Greer: Well, let's move on to Pfizer. Shares of Pfizer falling on earnings, down around 4%. Emily, what is going on with Pfizer?

Flippen: Ultimately, the big story with Pfizer is that they were not helped by the loss of patent exclusivity for Lyrica. That's Pfizer's drug used to treat pain from fibromyalgia and other nervous system diseases. That's a mouthful. It's essentially to say that, yeah, Lyrica lost two-thirds of its revenue over the past year because of the loss of this patent, which has really impacted Pfizer's bottom line. They missed on earnings. And that was actually a 13% decrease year over year in earnings. But, Pfizer's looking up for 2020. They're actually spinning off one of their divisions, Upjohn selling it to Mylan, and they're forming what they call a new Pfizer, which is a new and improved, smaller, lean, innovative machine.

Greer: A new Pfizer. I hope that works out better than the whole New Coke thing.

Flippen: I hope so, too.

Greer: Back to back to the loss of exclusivity. When you're looking at a drug maker like Pfizer, it's really all about the pipeline, right, for investors, and their ability to replenish that pipeline as they lose exclusivity?

Flippen: Exactly. And you have to recognize that Pfizer and other companies like this are always going to be very lumpy. They tend to have really great quarters, and then really bad quarters. It depends a lot on that patent process. I presume that new Pfizer's focus will be on biopharma. They have a lot of great products coming out in that division, as well as bringing their existing products into emerging markets. But the CEO, Albert Borella said that, quote, "The company will be a smaller, science-based company with a singular focus on innovation." So, hopefully, moving forward, that means that they're focusing on their core products that they see their ability to scale.

Greer: And as we wrap up, Emily, as I mentioned, I want to ask you about the coronavirus. Now, Chris and Jason talked about it on yesterday's show. We're seeing a lot of stocks getting hurt. Travel stocks, especially, and gaming stocks, like Wynn really falling, because of the coronavirus story. Now, Chris talked about how it's an opportunity to see how companies communicate, and to see how transparent and how forthcoming some of these companies are. We've seen Starbucks and Disney both make statements and close -- to see how companies communicate. As you watch this coronavirus story unfold, what are you watching? What's your big question?

Flippen: I think Chris hit the nail on the head with watching how these companies communicate. I will just add a grain of salt there, which is to say, what they're operating off of is limited information. And they're usually getting that information from the horse's mouth itself, which is the Chinese government. It's not the most reliable source of information. So, even though you can have companies that are trying their best to be as transparent as possible with what they know about the impact of this disease, if anybody is being over-communicative, it's probably going to give investors a feeling of false hope, right? Nobody really knows where this is going to develop. Nobody can really tell the impact of it.

What I'll be watching is seeing how this affects the general Chinese economy over the next quarter. Chinese stocks have been beaten down because of the trade war issues associated with our different governments. And this definitely does not help what I had initially hoped in 2020 would be a secular rotation back into Chinese companies. So, we need to make sure that this doesn't impact the Chinese economy too much, or these Chinese companies can continue to stay hit down.

Greer: And as we wrap up, the desert island question. You're on a desert island for the next five years, and for some reason, well, you're going to buy a stock. You have to buy one of these three stocks: McCormick, 3M, or Pfizer.

Flippen: That's such an easy question to me. For me, that's McCormick, 100%.

Greer: Wow, didn't even hesitate.

Flippen: I really don't need to. When I look off into the future five, 10 years from now, I see McCormick still being around. They're really the leader in their space. I think they're well-managed. They're not the biggest dividend player -- all of these companies are dividend payers, by the way -- but, they do pay a steady dividend. They have strong cash flows. Look, any company that acquires Frank's Red Hot is good in my book.

Greer: I like that. And they have the premade spice packs. You don't have to do anything. You just tear the thing up. Yeah, I love that, too.

Well, as always, people on the show may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely What you hear. Emily Flippen, thanks for joining me!

Flippen: Thanks for having me!

Greer: That's it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening and we will see you tomorrow.