McCormick shares downgraded to Buy rating, but price target raised by CFRA

CFRA adjusted its stance on McCormick (NYSE:MKC) & Company (NYSE: MKC), shifting the stock's rating from Strong Buy to Buy, while simultaneously increasing the price target to $93 from the previous $88.

The decision follows McCormick's third fiscal quarter (FQ3) performance, which showcased a significant year-over-year increase in adjusted earnings per share (EPS) and a revenue beat.

The spice manufacturer reported an adjusted EPS of $0.83 for the August quarter, a 28% rise from the prior year, surpassing expectations by $0.16.

The beat was partially attributed to a discrete tax benefit of $0.07 per share. Revenue came in at $1,680 million, exceeding estimates by $13 million. Notably, the company experienced a return to growth in volume/mix, up by 0.6%, marking an important achievement.

McCormick's gross margins improved by 170 basis points year-over-year to 37.7%, benefiting from cost savings and a favorable product mix within its Flavor Solutions segment.

Despite reaffirming its sales and profit outlook, which could be seen as underwhelming by some, the company raised its adjusted EPS guidance for the fiscal year to $2.85-$2.90, up from $2.80-$2.85.

CFRA's analyst noted that the FQ4 (November quarter) outlook includes a degree of conservatism. The downgrade to Buy reflects concerns over valuation, even as the firm maintains a positive view of McCormick's prospects.

The company's net debt to adjusted EBITDA ratio has improved to 3.3x, compared to 3.7x a year ago and 4.2x two years prior, suggesting the potential for share repurchases in the coming year.

In other recent news, McCormick & Co. has reported strong Q3 results, leading the company to raise its annual earnings forecast. The company's success is attributed to consumers cooking more at home, which has increased the demand for basic cooking ingredients such as spices and seasonings. The company's sales volume rose by 1% for the quarter ending August 31, showing a recovery from a decline seen the previous year.

McCormick's gross profit margin also expanded by 170 basis points to 38.7%, due to cost-saving initiatives and previous price increases. The company now anticipates its full-year sales to range between a 1% decrease and a 1% increase, an improvement on its previous forecast. The company's profit forecast for the year has also been adjusted, with an expected annual adjusted profit of $2.85 to $2.90 per share, up from the earlier estimate of $2.80 to $2.85.

For the third quarter, McCormick reported net sales of $1.68 billion, slightly above the $1.67 billion analysts had predicted. Its adjusted profit for the quarter was 83 cents per share, exceeding the anticipated 67 cents.

InvestingPro Insights

McCormick's recent performance and CFRA's updated outlook align with several key metrics and insights from InvestingPro. The company's market capitalization stands at $22.22 billion, reflecting its significant presence in the spice and flavoring industry.

InvestingPro data shows that McCormick's P/E ratio is 30.12, which is relatively high and supports CFRA's valuation concerns. This is further emphasized by an InvestingPro Tip indicating that the stock is "Trading at a high P/E ratio relative to near-term earnings growth."

On a positive note, McCormick has demonstrated strong dividend performance. An InvestingPro Tip highlights that the company "Has raised its dividend for 38 consecutive years," which is particularly relevant given the recent earnings beat and raised EPS guidance. This consistency in dividend growth could be attractive to income-focused investors.

The company's revenue for the last twelve months as of Q2 2024 was $6,683.4 million, with a modest growth of 2.57%. This aligns with the article's mention of a return to growth in volume/mix. Additionally, McCormick's gross profit margin of 38.05% for the same period closely matches the 37.7% reported in the recent quarter, indicating consistent performance.

For investors seeking more comprehensive analysis, InvestingPro offers 11 additional tips for McCormick, providing a deeper understanding of the company's financial health and market position.

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