What Boosted McCormick’s Q2 EPS Growth?

EPS beat analysts’ estimate

McCormick (MKC) posted stronger-than-expected second-quarter earnings. The company’s adjusted EPS of $1.16 beat analysts’ estimate of $1.08 and rose 13.7% on a YoY (year-over-year) basis.

McCormick’s second-quarter earnings benefited from continued margin expansion, which reflected strength in the base business and cost-savings. However, inflation in input costs remained a drag. McCormick’s adjusted EPS also benefited from a decline in the effective income tax rate. The company’s adjusted tax rate was 18.9% during the second quarter, which reflects a fall by 330 basis points from the second quarter of 2018.

What Boosted McCormick’s Q2 EPS Growth?

The increase in the adjusted operating income added $0.06 to the bottom line. Meanwhile, lower taxes added $0.05 to the adjusted EPS.

A lower effective tax rate also drove many packaged food companies’ bottom lines. General Mills’ (GIS) fourth-quarter adjusted EPS gained from a decline by 610 basis points in the tax rate. J.M. Smucker’s fourth-quarter EPS had high-single-digit growth due to a decline by 620 basis points in the effective tax rate. Hershey’s (HSY) earnings registered double-digit growth in the previous quarter, which reflected margin expansion and lower taxes.

Management raised guidance

Management raised the fiscal EPS outlook due to the company’s strong performance in the first half of 2019. Management expects its adjusted EPS to be $5.20–$5.30 in fiscal 2019—up from the previous guidance of $5.17–$5.27. The projected adjusted EPS range indicates growth of 5%–7% YoY.

We expect McCormick’s bottom line to continue to benefit from margin expansion and higher unconsolidated income. However, McCormick’s effective tax rate will likely be higher compared to the previous year, which is expected to hurt the EPS growth rate.