Spices and flavor giant McCormick (click ticker for report: ) started fiscal year 2013 with a solid first quarter. Revenue increased 3% year-over-year to $934 million, easily exceeding consensus estimates. Earnings per share rose 4% year-over-year to $0.57 per share, in-line with consensus expectations. We were pleased to see a strong surge in operating cash flow, which jumped 39% year-over-year to $32 million.
McCormick’s first quarter showed a remarkable divergence between its consumer and industrial businesses. The consumer business segment saw sales jump 7% driven by a 14% sales increase in emerging markets, as well as continued strength in the US and Europe. We think McCormick’s spices provide consumers with a relatively inexpensive way to improve tastes, which is important to value-conscious customers looking to save money by eating at home.
As the consumer business improved, the industrial business suffered a 2% decline in sales, driven by a 5% decrease in volume and mix which was offset by positive pricing action. The US quick-serve restaurant business demand was weak–not surprising given the anemic same-store sales growth rates we’ve seen at the likes of Jack in the Box (click ticker for report: ), McDonald’s (click ticker for report: ), and even Chipotle (click ticker for report: ). We believe same-store sales could accelerate later in the year if unemployment declines and consumer confidence remains high. McCormick also blamed a weak Chinese QSR environment, as industrial sales in the region tumbled 12%. Yum! Brands’ (click ticker for report: ) poultry scandal can be seen as the downward catalyst for the industry, but we’ve seen evidence that the sector is beginning to recover, which could boost McCormick’s fortunes in the back half of 2013.
Looking ahead, McCormick reiterated its guidance of 3% to 5% sales growth, driving earnings per share of $3.15-$3.23. Though results and guidance were decent, we believe shares look fairly valued at current levels. Investors have bid up the prices of stocks with defensive characteristics, so shares trade at 22x forward earnings—an even higher relative multiple to that of its food product peers. With a dividend yield under 2% at current prices, we simply do not believe the company looks attractive on a valuation or income basis.