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What’s Behind McCormick’s Q1 EPS Beat?

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Updated

EPS exceeded analysts’ estimate

McCormick (MKC) posted stronger-than-expected bottom line results for the first quarter of fiscal 2019. Its adjusted EPS of $1.12 came in ahead of analysts’ estimate of $1.03 and rose 12% YoY (year-over-year).

McCormick’s bottom line benefited from operating margin expansion, reflecting sales leverage, cost savings, and lower brand marketing. However, its investments in growth initiatives remained a drag. McCormick’s adjusted earnings also gained from a significant decline in the tax rate. The company’s adjusted effective tax rate stood at 13.9% during the reported quarter, reflecting a fall of 500 basis points from the previous year’s quarter.

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The earnings of the majority of packaged food companies are taking a hit from an increase in interest expenses. Margin pressure from higher input costs has also suppressed McCormick’s bottom line. Despite challenges, General Mills (GIS), Conagra Brands (CAG), and the J.M. Smucker Company (SJM) posted better-than-expected earnings results during their previously reported quarters thanks to price-restructuring initiatives and cost-saving efforts.

Outlook

McCormick’s management has reaffirmed its fiscal 2019 earnings outlook and expects its adjusted EPS to be between $5.17 and $5.27. This projected guidance range implies YoY growth of between 4% and 6%.

We expect McCormick to sustain the momentum in its earnings in the coming quarters. However, its rate of growth is likely to show sequential deceleration. McCormick’s effective tax rate is expected to be high compared to the previous year, which is expected to hurt its EPS growth rate. Management expects higher taxes to negatively affect the company’s EPS growth rate by 3%.

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