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McCormick May Get Spicy If It Improves Earnings

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  • After an initial dip, McCormick stock is flat following a disappointing earnings report.
  • The next couple of quarters will be prove-it quarters for investors.
  • There may be reasons to believe MKC stock will have upside.

On October 6, the spice maker McCormick & Company (NYSE:MKC) delivered a lackluster earnings report to investors. Revenue came in just about where analysts forecast at $1.60 billion.

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The bottom line, however, was where the real disappointment came in. The company posted earnings per share (EPS) of 69 cents. That was sharply below the 80 cents per share that was forecast. That 80 cents per share was also the same number the company had posted in the same quarter in 2021.

However, after a post-earnings dip of about 3%, MKC stock is back near its pre-earnings level. This may be a case of the company delivering an optimistic outlook for the supply chain issues that have bedeviled it since the onset of the Covid-19 pandemic.

In this article, we will look at what McCormick said on its earnings call and why it may make MKC stock a worthwhile hold for income-oriented investors.

A Different Kind of Earnings Recession

Over the past few weeks, investors have heard many analysts talk about an upcoming earnings recession. This was going to be fueled by the fact that businesses would no longer be able to pass along their elevated costs to consumers. There’s also a sentiment that consumer demand will wane as the effect of interest rate hikes combine with inflation to sap the will of consumers.

If that’s the case then a company like McCormick might be particularly susceptible. That’s because, if you’re the person who does the cooking and/or shopping in your home, you know that the company’s products are sold at a premium to house brands. And with consumers looking to cut back where they can, that price difference may be enough to cut down on sales.

But that’s not necessarily what the company’s numbers show. Revenue is holding up well. The company says it’s adding customers and shelf space. And that is reflected, somewhat, in the revenue numbers.

However, the same can’t be said of earnings. The company has missed on earnings in its last two quarters. And the losses have been significant, 25% in the prior quarter and 13% in this quarter.

It’s Time for McCormick to Prove It

On the company's earnings call, CEO Larry Kurzius said the company had passed an “inflection point” regarding earnings (slide 26 of earnings presentation). He went on to say the company was “beginning to recover cost inflation that had outpaced our pricing actions.”

That’s a lot of corporate-speak. But I take it to mean that the company is now saying it should be able to be profitable as it begins to command higher margins.

If that comes to pass, MKC stock is likely to have some upside ahead. But investors will need at least another quarter to confirm that this is occurring. And that could be tricky if the recession becomes more entrenched.

How to Look at McCormick Stock

In 2022, McCormick stock is down 22%. However, looking at the stock through a slightly longer lens, the stock is down “only” 5% in the last 12 months.

Pull back even further, and investors can see that McCormick is down 9% since its pre-pandemic levels. However, the company’s revenue is up about 25% during that time. The good news is that kind of revenue growth should prevent the stock from falling too far. The bad news is that without evidence that earnings are getting stronger, MKC stock is also not likely to move much higher either.

But with a company like McCormick, investors are buying the dividend. And McCormick is a dividend aristocrat having increased its dividend in each of its last 36 years. Although the rate of growth may slow, there’s no reason to believe that the dividend is in any jeopardy. However, as MarketBeat's Thomas Hughes wrote in June, there may be better dividend stock opportunities in the consumer staples sector.

Should you invest $1,000 in McCormick & Company, Incorporated right now?

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While McCormick & Company, Incorporated currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.

Article by Chris Markoch, MarketBeat