When McCormick (NYSE:MKC) delivered earnings in June, the consumer carried the day. Despite surveys that say Americans don’t like to cook, it seems they did just that in the early months of our global pandemic. Millions of Americans dusted off old recipe books and found their spice cabinets to be severely lacking.
Despite the forced closing of many bars and restaurants, McCormick posted earnings and revenue that were a beatfrom the prior quarter and on a year-over-year basis. However, not even McCormick management believed that was a sustainable result. The company knew it would need to see a recovery from the commercial sector if it was going to sustain those results.
The good news on that front is that in many parts of the country restaurants were able to squeak by on carryout and delivery orders. And now many have been able to reopen, albeit at limited capacity. The bad news is that in large urban centers, it may be some time before the restaurant and bar scene approaches anything close to normal.
That sets the stage for McCormick’s third quarter earnings report which will be released before the market opens on September 29.
Analysts Are Projecting the Stock to Drop
Right now, analysts are fairly bearish on McCormick. The 10 analysts that offer ratings on the stock have a consensus rating of “hold” and a bearish price target of $160.80. Of course opinions change and Argus has recently given the stock a very bullish price target of $215. But the sentiment seems to be that McCormick stock is likely to drop.
But will it drop right away? Analysts are forecasting positive earnings per share (EPS) of $1.52 for the quarter. That would be a slight beat from the $1.47 McCormick posted in the prior quarter. And it would be a 17% improvement on a year-over-year (YOY) basis.
But the outlook gets a little mixed when you look at the whisper number which is suggesting a $1.60 EPS on revenue of $1.39 billion. That would be basically mean the company’s revenue was flat in the quarter and only about a 4% beat YOY.
On the one hand that’s not completely unexpected. McCormick management cautioned against expecting to see consumer sales maintain the same level as in the prior quarter. And it does show that the company is becoming more profitable.
In the prior quarter, McCormick saw its operating income increase by more than 20%. This was not only due to increased demand but also to rising gross margins and operating profit margins. Given the expectation for a strong earnings number, analysts are expecting to see the company’s operating income improve.
Guidance Will Be Key
Investors gave many companies a pass when it came to future guidance in the last quarter. However, now that we’re getting later into the pandemic, they are expecting more straight talk from companies. I expect the same will be true for McCormick.
The company’s fiscal fourth quarter is historically one of its strongest quarters. And even if the economy teeters into a recession, the company has proven to be a defensive stock in the past. None of this is an assurance of future performance, but it should give investors some perspective.
The Stock May Fall After the Ex-Dividend Date Passes
McCormick is a solid dividend stock and the company’s ex-dividend date is on October 2, 2020. That means that the stock is likely to move higher no matter what the company reports. Although MKC stock is down 4% in the last month, it is up 3% in the last five trading days. This is likely due, in part, to value investors trying to get in before the ex-dividend date.
The dividend is supported by both earnings and cash flow so value investors should harbor no concerns about holding the stock for its dividend.
However, growth investors may want to pay attention. If the company forecasts a longer recovery for the restaurant industry, expect shares to drop a little. MKC stock is on an incredible run. It’s up over 70% since the lows of March. And since early summer, the stock has been hitting one record high after another. That would not appear to be sustainable merely from consumer demand. Nor would it be consistent with McCormick’s historic stock price movement.
The company has been a pandemic winner for sure, but McCormick stock looks a little overweight to me. The stock got support at the $185 level late last week. After what will probably be an ex-dividend inspired bounce, I might expect the stock to test that support level again.
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10 Stocks to Buy On Fears of a Second Coronavirus Wave
Ever since the U.S. economy began to re-open (and honestly before that), there was concern over the impending “second wave” of the novel coronavirus. And although the second wave of the virus was not expected to hit until the fall, the concerns have been escalating as case numbers rise in multiple states.
And despite the Trump administration’s vehement statements that the economy would not shut down, we learned on February 25 that Texas was now pausing, and in some cases rolling back, its reopening measures in an effort to stem the spread of the virus.
And this is happening as the Centers for Disease Control (CDC) is now saying that it’s possible that 20 million Americans may have the coronavirus based on a sample of blood tests that are showing who has the antibodies in their system.
For its part, the stock market reacted sharply to the move. It was a move that undoubtedly frustrated many weary investors. In fact, you might be among those that have had just about enough of the Covid-19 market. I understand, I’m there too.
But, institutional investors are forward-looking. And right now, they don’t like what they. So stocks are having another broad selloff.
However, in the midst of any selloff, there is money to be made. And the good news for investors is that many of the same stocks that were good buys in March, are still the stocks to buy right now. And while some of these stocks fit the classic definition of defensive stocks, you’ll find a few genuine growth stocks included on this list as well.
View the "10 Stocks to Buy On Fears of a Second Coronavirus Wave".