McCormick & Co. Earnings Analysis: Milking the Business?

McCormick & Co. Earnings Analysis: Milking the Business?

Earnings Analysis for McCormick & Company, Incorporated (NYSE:MKC)

McCormick & Co. Earnings Analysis: Milking the Business?

McCormick & Company, Incorporated (NYSE:MKC) had its earnings call late last week to discuss its Q3 2013 results. The company manufactures, markets and distributes spices, seasoning mixes, condiments and other flavorful products to the entire food industry, retail outlets, food manufacturers and foodservice businesses. Its sales, distribution and production facilities are located in North America and Europe with additional facilities in China, Australia, Mexico, India, Singapore, Central America, Thailand and South Africa.

Based on its  preliminary financial results for the quarter ended 2013-08-31 we analyze the company relative to its competitors like ConAgra Foods and Hain Celestial Group (see the end of this post for the peer list). You can find key valuation items as well as PEG ratios for the company and its peers here. The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

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Quarterly (USD million) 2013-08-31 2013-05-31 2013-02-28 2012-11-30 2012-08-31
Revenues 1,016.4 1,002.6 934.4 1,145.8 977.7
Revenue Growth % 1.4 7.3 (18.5) 17.2 (0.6)
Net Income 104.4 78.6 76.0 148.5 104.4
Net Income Growth % 32.8 3.4 (48.8) 42.2 29.9
Net Margin % 10.3 7.8 8.1 13.0 10.7
ROE % (Annualized) 23.9 18.4 17.9 35.1 25.1
ROA % (Annualized) 9.8 7.6 7.4 14.4 10.4

Valuation Drivers

McCormick & Company, Incorporated currently trades at a higher Price/Book ratio (4.8) than its peer median (3.6). MKC’s operating performance is higher than the median of its chosen peers (ROE of 23.4% compared to the peer median ROE of 11.1%) but the market does not seem to expect higher growth relative to peers (PE of 21.4 compared to peer median of 20.6) but simply to maintain its relatively high rates of return.

The company attempts to achieve high profit margins (currently 9.9% vs. peer median of 6.9%) through differentiated products. It currently operates with peer median asset turns of 1.0x. McCormick & Company, Incorporated’s net margin is similar to its five-year average net margin of 9.8%.

MKC: Milking its Business?

McCormick & Company, Incorporated’s revenues have grown at about the same rate as its peers (7.9% vs. 8.7% respectively for the past three years). Similarly, the stock price implies median long-term growth as its PE ratio is around the peer median of 21.4. The historical performance and long-term growth expectations for the company are largely in sync.

McCormick & Company, Incorporated (NYSE:MKC)’s annualized rate of change in capital of 7.1% over the past three years is less than its peer median of 14.5%. This investment has generated a better than peer median return on capital of 14.9% averaged over the same three years. This combination of a relatively low investment with good returns suggests that the company is likely milking its business.

Earnings Quality

McCormick & Company, Incorporated has reported relatively strong net income margin for the last twelve months (9.9% vs. peer median of 6.9%). This strong margin performance was accompanied by a level of accruals that was around peer median (0.5% vs. peer median of 0.5%) suggesting that the reported net income is supported by a reasonable level of accruals.

MKC’s accruals over the last twelve months are around zero. This level is also around the peer median suggesting a proper level of reserves.

Trend Charts for MKC

Quarterly and Annual Revenues Trend for McCormick and Company (NYSE:MKC)Quarterly and Annual Net Margin Trends for McCormick (NYSE:MKC)Quarterly Annual Accruals Trend for McCormick (NYSE:MKC)

McCormick & Company, Incorporated (NYSE:MKC) Dividend quality and support for changes

In addition to publishing earnings release analysis we also produce Fundamental Analysis, Likely Corporate Actions, Dividend Quality and Earnings Quality reports.

Dividend Quality for McCormick & Company, Incorporated (NYSE:MKC)

While we rate the last dividend paid over the last twelve months as  High Quality, the dividend trend has not been consistent over the last five years. More on our dividend quality methodology here.

Support for Dividend Increase for MKC

In the case of McCormick & Company, Incorporated our Likely Corporate Actions report suggests that though the company’s operating performance, leverage, liquidity, growth expectations and share price performance combined with a high dividend quality support an increase in dividend, it is offset by a weak cash cushion (for its dividend).

Peer List used for Analysis

McCormick & Company, Incorporated (NYSE:MKC)’s analysis versus peers uses the following peer-set: ConAgra Foods, Inc. (NYSE:CAG), Tiger Brands Ltd (OTCMKTS:TBLMY), The Hain Celestial Group, Inc. (NASDAQ:HAIN), TreeHouse Foods Inc. (NYSE:THS), Naturex SA (EPA:NRX) and S&B FOODS INC. (TYO:2805).



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