Last night on "Mad Money," Jim Cramer said spice maker McCormick & Co. (MKC) is a buy. After missing estimates two weeks ago, the shares were mercilessly pounded into the ground as investors ran for cover. The stock is still limping around looking to recover. I looked at the company last September and thought the shares were too spicy. Since then (and after the recent shellacking), the stock is up about $0.29. I'm not so certain there will be a big rebound in the stock any time soon.
On Jan. 24, McCormick's fourth quarter earnings missed the Street estimate by $0.03 and it lowered guidance for 2013. The company posted revenue growth of just 3.2% to $1.15 billion vs. the consensus of $1.17 billion. For 2013, management told investors to expect earnings per share in the $3.15 to $3.23 range vs. the previous estimate of $3.33. The company said first-quarter sales growth would be below the 5% rate investors were modeling, since comparisons with last year's results will be very difficult to beat. The stock sold off on the disappointing news.
Last year, the company knocked expectations out of the park when it was able to produce 15.8% top-line sales growth in the first quarter. Sales grew 13.4% in its industrial spice business. Volume rose 9.5% on top of a 5% price increase. The consumer business grew 17.6%, mostly due to acquisitions and price increases. That won't happen in 2013. In fact, total North American sales last year jumped 7.3% on a 6.8% price increase. In emerging markets, total sales grew 25.4%, almost entirely driven by acquisitions. Asia/Pacific sales growth of 109.5% was almost entirely driven by acquisitions, including a joint venture with Indian rice and spice maker Kohinoor. Double-digit growth doesn't come around too often in the spice business, and it looks like last year's first quarter was a fluke.
Right now, the Street is looking for first-quarter revenue to be up just 1.73% to $922.50 million. For the full year, analysts expect fiscal 2013 revenues to be up just 5% to $4.22 billion. Yawn!
I understand McCormick is trying to turn into a growth machine. Last year the company introduced more than 200 new products, went on an acquisition binge and jammed through price increases up and down its product line. Now it needs time to consolidate those deals and it needs those price increases to stick. Despite all those price increases, margins have been under pressure for at least the last three quarters. And it looks like the first quarter will make it a year of margin pressure.
Until McCormick can get back on a sustainable growth path, I believe the shares will underperform the market.