On Mccormick & Company Inc (NYSE: MKC) While food companies typically fight for supermarket shelf space, McCormick’s well-known brands are preferred by retailers. Through its Comprehensive Continuous Improvement (CCI) program, McCormick is lowering costs and improving productivity, which has led to wider margins and higher earnings in recent quarters. We expect cost savings from the program to continue to boost margins and earnings going forward. In addition, while the company’s foodservice business has been hurt by restaurant closures, we expect sales to improve as the pandemic recedes, and look for strong grocery and supermarket sales due to increased dining at home. Given the company’s clean balance sheet, strong cash flow, and access to capital, we think it is well positioned to overcome the impact of the pandemic.
Year-to-date, MKC shares have posted a total return of 12%, well above the S &P 500. On September 29, McCormick reported fiscal 3Q20 results. Adjusted earnings of $1.53 per share rose 5% year-over-year, and topped the consensus estimate by a penny. Sales totaled $1.43 billion, up 8% year-over-year despite a 100-basis-point currency headwind. Adjusted operating income rose to $273 million, up 5% as reported and 6% in constant currency. Consumer segment sales rose 15% to $911 million, led by the Americas, with 17% growth, and EMEA, with 23% growth. However, sales in the Asia-Pacific region fell 9% due to foreign currency headwinds and higher sales of away-from-home products. As discussed in our last note, in FY19, revenue decreased 1% to $5.35 billion.
EARNINGS & GROWTH ANALYSIS
While McCormick has been hurt by the COVID-19 pandemic, we expect its Consumer business to perform better than those of other Consumer Staples companies. We note that the Consumer segment represents 61% of total revenue and should continue to outweigh weakness in the smaller Flavor Solutions segment. MKC has reinstated its FY20 guidance. Reflecting the impact of prices increases taken earlier in the fiscal year, it now forecasts revenue growth at the high end of 4%-5% guidance range (5%-6% in constant currency). Turning to the income statement, we expect FY20 revenue to increase approximately 5% to $5.6 billion. On the bottom line, we look for FY20 adjusted EPS of $5.80. In FY21, we expect a 2% increase in revenue to $5.7 billion and EPS of $6.00.
Consumer accounted for approximately 61% of total sales in FY19 and Flavor Solutions for the remainder.
MKC shares have traded between 20- and 38-times forward earnings over the past three years, and are currently trading at 32.6-times our FY21 EPS estimate. Given the increase in meals prepared at home during the pandemic and the company’s consistent earnings, we believe the shares warrant a higher multiple. Our target price of $215 assumes a multiple of 36-times our FY21 estimate and a potential total return, including the dividend, of nearly 15% from current levels.