Image Source: McCormick
By Brian Nelson, CFA
On March 26, spice maker McCormick & Company (MKC) reported solid first quarter fiscal 2024 results for the period ended February 29. The company’s sales advanced 2% on a constant-currency basis, while adjusted operating income increased 4% on a constant-currency basis. Adjusted earnings per share came in at $0.63 compared to $0.59 in the same period last year, showcasing a 7% year-over-year increase. The results were good enough to send the stock meaningfully higher following the report.
McCormick’s top line in the quarter was bolstered by a 3% increase in pricing, which was offset in part by a 1% decline in volume due primarily to mix and the company’s decision to exit lower margin business. The strong pricing performance drove its gross profit 140 basis points higher in the quarter, but cost savings also helped. Excluding special charges, the firm’s operating income in its Consumer segment increased 2%, while segment operating income advanced 14% in its Flavor Solutions segment on a constant currency basis.
The company’s outlook for 2024 was encouraging:
In 2024, McCormick expects sales to range between (2)% to 0% compared to 2023, or (1)% to 1% on a constant currency basis. The Company expects a favorable impact from the prior year’s pricing actions.…Excluding the impact of special charges in 2024 and 2023, adjusted operating income is expected to increase 3% to 5%, or in constant currency 4% to 6%, driven by gross margin expansion partially offset by a significant increase in brand marketing investments…
…McCormick projects 2024 earnings per share to be in the range of $2.76 to $2.81, compared to $2.52 of earnings per share in 2023. The Company expects special charges to lower earnings per share by $0.04 in 2024. Excluding these impacts in 2024 and 2023, the Company projects 2024 adjusted earnings per share to be in the range of $2.80 to $2.85, compared to $2.70 of adjusted earnings per share in 2023, which represents an expected increase of 4% to 6%, or in constant currency 5% to 7%. For fiscal 2024, the Company expects strong cash flow driven by profit and working capital initiatives and anticipates returning a significant portion of cash flow to shareholders through dividends.
McCormick ended the quarter with cash of $178 million and a short- and long-term debt of $4.46 billion. For the three months ended February 29, operating cash flow increased to $138.4 million from $103.4 million in the year ago period, while capital expenditures were relatively flat on a year-over-year basis. Free cash flow generation of $76.4 million in the quarter was below that which it paid in cash dividends ($112.7 million), however. McCormick currently trades at the high end of our fair value estimate range and sports a dividend yield of ~2.4%. We like its business model, but it doesn’t quite fit what we’re looking for given its net debt position and growing competition from value-oriented spice offerings.
NOW READ: 12 Reasons to Stay Aggressive in 2024
NOW READ: 2023 Was a Fantastic Year! Are You Ready for 2024?
———-
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, RSP, SCHG, QQQ, QQQM, and VOO. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.