Spice and industrial flavorings conglomerate McCormick (NYSE:MKC) revealed very slight growth to close out the year in its fiscal fourth-quarter 2019 earnings report released Tuesday. The company layered this result with an anemic earnings forecast for fiscal 2020, spurring shareholder disappointment and sending shares down nearly 4% during Tuesday's trading session.
Let's walk through critical details from the multinational's filing and discuss why investors should keep a balanced view of the company's prospects. Note that all comparative numbers below are presented against those of the prior-year quarter.
McCormick results: The headline numbers
|Metric||Q4 2019||Q4 2018||Change|
|Revenue||$1.49 billion||$1.47 billion||1.4%|
|Net income||$213.4 million||$214.0 million||(0.3%)|
|Diluted earnings per share||$1.59||$1.60||(0.7%)|
Essential highlights from the quarter
- McCormick observed that reported sales included a single percentage point impact from foreign currency translation; on an organic basis, revenue rose just over 2%.
- Consumer segment sales grew by 1% to $967 million. U.S. revenue growth of 2% offset a 5% top-line decline in the Europe, Middle East, and Africa (EMEA) region, which saw weaker sales of private-label brands. Sales were flat in the Asia-Pacific region.
- Flavor solutions segment sales expanded by 2% to $518 million. Flavor solutions sales in the Americas region advanced by 3%, while EMEA sales improved by 2%. Both segments benefited from strong core business as well as the introduction of new products, and EMEA also enjoyed higher pricing power during the quarter. Asia-Pacific sales were flat against the comparable quarter.
- McCormick's gross margin rose by 120 basis points to 42.4%. Management attributed the progress to its multiyear "Comprehensive Continuous Improvement" (CCI) productivity initiative. Operating margin inched up by 30 basis points to 20.2%, as the higher gross margin was partially offset by a slight rise in selling, general, and administrative (SG&A) expenses.
Taking a disappointing outlook in stride
McCormick presented its fiscal 2020 outlook on Tuesday, which anticipates year-over-year revenue growth of 2% to 4%. Management pointed out that since the company has lapped the effects of all recent acquisitions, the projected revenue increase will be derived solely from organic growth.
This is actually a decent growth rate for a global consumer staples giant, and current shareholders likely would have been pleased were it not for an extremely muted earnings per share (EPS) projection. McCormick forecasts that fiscal 2020 EPS will land between $5.15 and $5.25, and at the midpoint of the range, this will actually trail 2019 EPS of $5.24.
Management cited two factors for the thin bottom-line growth outlook: an impact of three percentage points from a higher estimated tax rate in 2020, and an impact of seven percentage points from "incremental business transformation expenses." So, the benefit of a moderate sales increase will mostly be absorbed in the coming year as McCormick makes investments in operational productivity and longer-term revenue-generating opportunities.
Investors looking for a short-term share price catalyst in the form of strong EPS projections may have had their hopes thwarted with the fourth-quarter release, but McCormick remains a persuasive investment for investors with a longer time horizon. Additional investment in CCI and related business transformation projects should help McCormick boost gross margins in the coming years, while ensuring that it continues to generate ample cash from operations.
At present, McCormick is using its cash flow to pay down debt from its 2017 purchase of the French's Mustard and Frank's RedHot hot sauce brands from Reckitt Benckiser. McCormick has decreased its debt load from $5.4 billion following the acquisition to $4.3 billion at the end of Q4 2019.
Given its declining leverage, McCormick is likely to engage in small, bolt-on acquisitions in the coming quarters to supplement future earnings. According to management, fully one-third of the company's long-term revenue growth target of 4% to 6% is expected to be supplied by mergers and acquisitions, and on Tuesday's fourth-quarter earnings conference call, executives reiterated that McCormick is actively evaluating modest acquisitions in its major business lines of spices, condiments, and flavorings.
And of course, the company is also utilizing its cash-generating prowess to continue to pad shareholder returns with an ever-increasing dividend. The Dividend Aristocrat recently raised its quarterly payout by 9%, marking its 34th consecutive year of dividend increases. McCormick's payout ratio currently stands at a reasonable 42%, so it has ample capacity to write quarterly checks while maintaining its annual dividend increase streak. For income-seeking investors who value growth and safety, McCormick remains a solid buy.