McCormick Q3 results: what to watch

McCormick (NYSE: MKC) shareholders are in for a busy week. The spice and flavoring giant is announcing its latest results in just a few days in a report that will answer some major questions swirling around the company. Stocks have largely followed the market so far in 2021, although McCormick is seeing solid growth.

Instead, Wall Street focused on concerns such as rising costs and an impending post-pandemic slowdown. Let’s look at how McCormick could allay those concerns in his third quarter earnings announcement on Thursday, September 30.

Image source: Getty Images.

Will McCormick’s sales gains hold up?

McCormick’s latest report showed that demand remains exceptionally strong for its home cooking products. Sales increased 8% through the end of May, which is roughly equal to that of its boost counterpart PepsiCo has seen so far in 2021.

McCormick’s business is benefiting from this increase in industry-wide demand, as well as major acquisitions such as Cholula Hot Sauce and the French’s and Frank’s RedHot condiment franchises. “We are capitalizing on accelerating consumer trends,” CEO Lawrence Kurzius said in early July as the company raised its outlook for 2021. Most investors expect sales gains to hold steady, reaching around 7% for the third fiscal quarter.

Did the price increases affect McCormick’s volume?

McCormick recently began rolling out large price increases to accommodate higher commodity costs and rising transportation expenses. This week’s report will be a test of its pricing power in this manner, with rising volumes demonstrating the strength of the company. Conversely, if volumes slow more than management expected, McCormick could find himself in a difficult second half of 2021 as he aims to balance market share and profitability.

MKC Operating Margin Chart (TTM)

MKC operating margin data (TTM) by YCharts

There are no signs of a challenge at this level yet, and in fact, margins are increasing thanks to McCormick’s high-end products and a tilt in demand towards condiments and sauces. I expect this positive trend to continue for the rest of the year.

What will McCormick’s adjusted outlook say?

We will know on Thursday whether Kurzius and his team have seen data in the past few weeks that supports an adjustment in their outlook for 2021. Ahead of the report’s release, the company is targeting sales gains of between 8% and 10% after adjusting for currency changes. Profits are expected to increase at a slightly faster pace due to favorable factors such as higher spending by food buyers.

Factors such as a new tilt towards its premium spices and flavors or a positive response to price increases could convince management to improve its growth prospects for the second time in a row. On the flip side, operating forecasts could become more conservative given new outbreaks of COVID-19 and rising supply chain costs.

But McCormick’s long-term outlook looks bright, regardless of any changes to those short-term forecasts. The company is set to increase sales and earnings by double-digit percentages this year, in addition to strong 2020 results. Its annual free cash flow also recently crossed the billion dollar mark, which is expected to give management a lot of flexibility as they pay down debt, raise the dividend, and begin to redirect cash to share buybacks in the quarters to come.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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