As a Dividend Aristocrat and the parent of over a dozen familiar supermarket brand names including Old Bay and Cholula, McCormick (MKC -0.32%) is a textbook definition of a safe stock . In this episode of "Beat and Raise" recorded Jan. 27, Fool contributors Toby Bordelon and Brian Withers share their thoughts on McCormick's latest quarter and why the company could see stronger profit growth in 2022.
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Brian Withers: All right Toby, did McCormick have some spicy earnings or what?
Toby Bordelon: It was a pretty good report, Brian. It was a pretty good report. I'm going to start to call it spicy.
Brian Withers: [laughs] I just had to throw it out there.
Toby Bordelon: I know. It's too good not to, right?
Brian Withers: The shares were up almost seven percent today.
Toby Bordelon: They were. There were some positive things. Let's put it that way. There were certainly some positive things about the report. Here we go. Let's show people what happened, the basics here. You can see that pop at the end there.
Brian Withers: Yeah.
Toby Bordelon: We've been lagging the S&P, we're still lagging the S&P, but we've got a really good pop there. There's a couple reasons for that, I think. So let's talk about the sales for the fiscal year here. We have $6.3 billion in sales up 13 percent up 18 percent from 2019 so you're seeing some nice growth in those pre-pandemic levels. For the fourth quarter, we had sales up 11 percent of 1.7 billion, so you see 13 percent for the year, 11 percent for the quarter. Maybe slowing a little bit as the year goes by. On earnings, $2.80 cents up from $2.78 last year, so not much there. But we did see an increase. From the fourth quarter, we saw earnings actually down a penny, $0.73 cents versus $0.74. What we are seeing there, I think is a result of rising prices, in large part. You're seeing really nice revenue growth, but not much growth at all on the bottom line there. You're seeing increased costs eating into some of that additional revenue they're generating.
I mean, you look at operating income. Operating income in the fourth quarter barely changed. Eleven percent in increase in sales, but operating income, $276 million versus $275 million. So you see pretty much in terms of their operations, all of that extra revenue was eaten up in increased costs. So you look at that and say, "Well, why did the stock go up?" If that's what we're seeing, if we're seeing increased costs, such as they can't increase profitability at least in the past year, why did the stock go up? It's because of the guidance. They said we're looking for 3-5 percent increase in sales in 2022. But even better, we're looking for our operating income to grow 13-15 percent. We're seeing the opposite now. They're saying where sales aren't going to go as much but our operating income is going to go up a lot more. They're saying earnings-per-share, they're looking for $3.07-$3.12 for the full year. Really nice increase there, and one thing they said in the conference call so they did talk about the costs and supply chain challenges. But they said we expect we're going to fully offset that, the pricing increase and costs and that's what they're guiding for. They're guiding for we're going to take all of that back next year by being able to raise prices, by being able to cut some costs perhaps, and so even if our revenue slows, we're going to make it back on the bottom line. So we're going to be able to deal with what we're seeing in the market in terms of rising costs.
Brian Withers: I know in the past, Toby, we've talked about the mix between McCormick to restaurants in bulk. In big jugs of spices versus where you and I as consumers will buy a teeny little piece and that restaurant segment for them is much more profitable just because of the lower cost of packaging, the lower cost of shipping and all that kind of stuff.
Toby Bordelon: Historically that's been true. But here's interesting, let's look at the breakdown on the fourth quarter. The consumer segment was up 10 percent in revenue with operating income up 13.5 percent. In the flavor solutions segment, which is that commercial restaurant business, revenue up 14 percent so bigger revenue increase, operating income down 14 percent. You're seeing in this instance, in this quarter probably because they haven't been able to more quickly pass on price increases in that consumer segment is my guess. Likely due to the way the pricing and contracts works with restaurants and whatnot, and also probably because you'd have fewer issues with supply chains. I mean, a consumer is going to buy it when it's on the shelf. But a restaurant, you just got to get it to them. This commercial business you've got to get to them. Even if it might cost you more to do that to meet their deadline.
Brian Withers: Which makes sense why they say they're going to make it up next year as contracts come and get renewed.
Toby Bordelon: Yeah. They did acquisitions of Cholula and FONA recently, so those are doing really well. With the integrations going well, they are contributing to the company nicely. That's good to see. They also said we're continuing to see an increase in cooking at home. They noted this trend started before the pandemic. So the pandemic in their mind accelerated this trend perhaps and they say that's holding up, we're still seeing that, which is nice. I think the overall takeaway here as I'm optimistic about the growth I'm seeing in the consumer business, I think that's going to continue. But they say, 2022, more operating income we're going to get there, we're going to make it up in price increases, let see them do it. I want to see those results over this coming year. I think that's what the market is saying with this increase, and that if you can do that, that's cool. But we are not going to get too excited until we see Q1, Q2, and we see evidence that you are in fact making progress toward that goal. But it's promising. I think it's promising from what I see.
Brian Withers: The other cool fact about McCormick is that they've raised the dividend every year for 35 years in a row. Even with the challenges that they had with the coronavirus and demand falling off for restaurants and whatnot, they protected the dividend, and that's I think what shareholders love about this company is that stable income that they get.