Sweet and sour
The drop in net income compared to the previous year's third quarter was partly due to a favorable tax benefit last year, which makes for tough year-over-year comparisons. The company's total revenues zoomed 16% to $920 million. Operating income was also up a bit at $128.4 million despite a decline in gross and net margins due to rising raw material costs. Additionally, selling and administration margins were kept low at 25.7%, highlighting the company's ability to control sales expenses.
Cooking up a storm
Like many in the industry, McCormick's profits and margins have declined due to rising prices of commodities such as cinnamon and pepper, along with packaging-related costs.
McCormick has responded by increasing product prices and introducing cost-cutting measures. So far, that's been working, with its consumer segment growing 15% and its industrial segment 17%.
McCormick has also been on the spice route to expansion through various deals including its acquisition of Polish spice maker Kamis and a joint venture with Kohinoor Foods in India. The company has also stepped up efforts to enter emerging markets, prompted by encouraging growth in Chinese sales.
Spicier than you think
While McCormick may not be protected against rising input costs, the company has certainly kept a good track record of exceeding analysts' expectations for seven consecutive quarters. Moreover, given that McCormick is a dominant player in the spices and condiments market, I feel that it is better positioned to withstand fluctuations in commodity prices than its peers. With 40% of commercial sales originating from large food manufacturers such as PepsiCo
The Foolish bottom line
Although a rise in the cost of inputs can have a negative impact on McCormick's margins in the short term, for the long term, this company can realize a great deal of growth, especially from emerging markets. Fools should consider adding a dash of McCormick to their platter of stocks.
Fool contributor Keki Fatakia does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares of PepsiCo and Yum! Brands. Motley Fool newsletter services have recommended buying shares of Yum! Brands, PepsiCo, and McCormick, as well as creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.