Why McCormick expects strong earnings growth in 2022

Aits Dividend Aristocrat and the parent company of more than a dozen well-known supermarket brands, including Old Bay and Cholula, McCormick (NYSE: MKC) is a classic definition of a safe stock . In this episode of “Beat and Raise” recorded January 27dork contributors Toby Bordelon and Brian Withers share their thoughts on McCormick’s last quarter and why the company could see stronger earnings growth in 2022.

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Brian Wither: Alright Toby, did McCormick have any spicy gains or what?

Toby Bordelon: That was a pretty good report, Brian. It was a very good report. I’ll start calling it spicy.

Brian Wither: [laughs] I just had to throw it over there.

Toby Bordelon: I say. It’s too good not to, isn’t it?

Brian Wither: The shares rose nearly seven percent today.

Toby Bordelon: They were. There were positive things. Let’s put it this way. There were certainly positive things in the report. Here we are. Let’s show people what happened, the basics here. You can see that pop at the end there.

Brian Wither: Yeah.

Toby Bordelon: We’ve been behind the S&P, we’re still behind the S&P, but we’ve got really good pop there. There are several reasons for this, I think. So let’s talk about sales for the fiscal year here. We have $6.3 billion in sales up 13% up 18% from 2019, so you’re seeing some nice growth from those pre-pandemic levels. For the fourth quarter, we had sales up 11% to 1.7 billion, so you see 13% for the year, 11% for the quarter. Maybe slow down a bit as the year progresses. On revenue, 2.80 cents more than $2.78 last year, so not much. But we have seen an increase. Starting in the fourth quarter, we saw earnings drop by a penny, $0.73 from $0.74. What we’re seeing there, I think, is largely a result of rising prices. You see very nice revenue growth, but not much growth at all on the bottom line there. You see rising costs eating away at some of the extra revenue they generate.

I mean, you look at operating profit. Fourth-quarter operating profit was barely changed. Eleven percent increase in sales, but operating profit of $276 million from $275 million. So you see pretty much in terms of their operations, all of that extra revenue has been eaten up by increased costs. So you look at that and say, “Well, why did the stock go up?” If that’s what we’re seeing, if we’re seeing an increase in costs, such that they can’t increase profitability at least in the last year, why has the stock gone up? It’s because of the tips. They said we were looking for a 3-5% increase in sales in 2022. But even better, we want our operating profit to increase by 13-15%. We see the opposite now. They say sales won’t go up as much, but our operating profit will go up a lot more. They say earnings per share they are looking for $3.07 to $3.12 for the full year. A really nice increase there, and one thing they said on the conference call, so they talked about the costs and the supply chain challenges. But they said we plan to fully offset that, the increased prices and costs and that’s what they’re advocating. They’re guiding us because we’re going to take all of that back next year being able to raise prices, being able to lower some of the costs maybe, and so even if our revenue slows down, we’re going to get back to the line of the low. So we’re going to be able to deal with what we’re seeing in the market in terms of rising costs.

Brian Wither: I know in the past, Toby, we’ve talked about the mix between McCormick and bulk restaurants. In large spice jugs versus where you and I as consumers will buy a very small piece and this restaurant segment for them is much more profitable simply because of the lower cost of packaging, the cost of lower shipping and all that stuff.

Toby Bordelon: Historically, that’s true. But here it is interesting, let’s look at the breakdown on the fourth quarter. The consumer segment grew revenue 10% with operating profit up 13.5%. In the flavor solutions segment, which is that commercial catering business, revenue was up 14%, so bigger revenue increase, operating profit down 14%. You see in this case, in this quarter, probably because they weren’t able to pass on price increases in that consumer segment any faster, I guess. Probably because of how pricing and contracts work with restaurants and so on, and probably also because you’d have fewer issues with supply chains. I mean, a consumer is going to buy it when it’s on the shelf. But a restaurant, you just have to bring it to them. This business venture, you have to reach them. Even though it may cost you more to do so to meet their deadline.

Brian Wither: Which makes sense why they say they will catch up next year as contracts are renewed.

Toby Bordelon: Yeah. They recently acquired Cholula and FONA, so they are doing very well. With integrations going well, they are contributing well to the business. It’s good to see. They also said we continue to see an increase in home cooking. They noted that this trend started before the pandemic. So the pandemic in their minds may have accelerated that trend and they’re saying it’s holding up, we’re still seeing it, which is good. I think the overall bottom line here, because I’m optimistic about the growth I’m seeing in the consumer sector, I think that’s going to continue. But they say, 2022, more operating income we’re going to get there, we’re going to catch up in price increases, let them. I want to see these results over the next year. I think that’s what the market is saying with this increase, and if you can do that, that’s cool. But we’re not going to get too excited until we see Q1, Q2, and we see evidence that you’re actually making progress towards that. But it’s promising. I think it’s promising from what I see.

Brian Wither: The other interesting fact about McCormick is that they have increased the dividend every year for 35 consecutive years. Even with the challenges they’ve had with the coronavirus and the drop in demand for restaurants and so on, they’ve protected the dividend, and I think what shareholders love about this business is that income stable they get.

Brian Wither has no position in the stocks mentioned. Jeremy Bowman has no position in the stocks mentioned. Toby Bordelon has no position in the stocks mentioned. The Motley Fool recommends McCormick. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.