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McCormick & Co. (NYSE: MKC) reported weak earnings that missed analyst expectations Thursday, which sent the stock 4.3% lower in market trading. McCormick manufactures, markets, and distributes spices, seasoning mixes, and condiments. It’s a slow-and-steady type of company that generally meets expectations, but this quarter, the company fell short.
Trouble Abroad
McCormick reported fiscal third-quarter profit of $97.6 million, or $0.76 per share. Adjusting for one-time costs, McCormick earned $0.85 per share. McCormick earnings fell short of analyst expectations, which called for $0.87 per share in adjusted EPS.
The good news is that revenue was $1.06 billion, which slightly beat the $1.05 billion expected by Wall Street.
Still, these results weren’t good enough to appease investors. The stock has had a great run in recent months. Shares of McCormick had gained 11% since the start of the year and 23% over the past one year. It has significantly outperformed the broader market. The S&P 500 Index is down 7% so far this year. As a result, investors had ratcheted up their expectations for the company.
One reason the company is performing below expectations is the brutal impact from foreign exchange. In recent years, McCormick has significantly invested in building up its international business, to capitalize on growth opportunities outside the United States. But due to the strengthening U.S. dollar, McCormick’s sales grew only 2% last quarter.
However, excluding the impacts of currency, sales would have grown 7%. That is a promising indication that while foreign exchange is a headwind for the overall numbers, underlying demand for McCormick’s products remains strong.
Another factor weighing on McCormick earnings last quarter was weaker-than-expected performance in its India business. McCormick invested $115 million in Kohinoor in 2011, but that business did not meet expectations last quarter. In response, the company plans to exit certain low-margin products lines there, like basmati rice, and instead will focus on delivering new, higher-margin products going forward.
Nevertheless, the company took a $3 million write-down of its Kohinoor inventory last quarter, and also absorbed a $10 million impairment charge reducing the value of the Kohinoor brand name. That being said, the company still views India as a compelling long-term growth market, and it is easy to see why. India has a population of roughly 1 billion, and an emerging consumer class.
Overall, McCormick expects full-year earnings will come in toward the lower end of a $3.11 to $3.18 per share range. This was a reduction from management’s forecast last quarter, which called for $3.18 to $3.25 per share.
McCormick: Still a Great Dividend Pick
McCormick is showing some cracks in its armor, evident by its poor earnings report. On a valuation basis, it’s a little pricey. The stock trades for 24 times trailing earnings, which is above the market’s average multiple.
The bright side is that McCormick is a legendary dividend stock, with a long track record of paying and raising its dividend. In fact, McCormick has made consecutive dividend payments for 91 years in a row. The stock currently yields 2%.
If McCormick can improve its performance in future quarters, the stock can continue to do well. And, even if the struggles continue, McCormick generates steady growth and plenty of profits, to continue increasing its dividend for many years.
Dividends for Every Month of the Year
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