Although McCormick & Co. Inc. (NYSE:MKC) reported excellent financial results, the author is downgrading the shares to neutral.
First quarter results demonstrated the effectiveness of strategy and growth initiatives. Sales grew 16% fueled by gains in both the consumer and industrial businesses. Over half of the increase was from strong underlying growth in volume and product mix, along with prices. Gaines were also fueled by acquisitions completed in 2011.
McCormick reported earnings per share of $0.55; below 1Q 2011 result of $0.57. Earnings came in ahead of guidance for the quarter on stronger than anticipated sales growth. The company is reaffirming FY2012 guidance of 9 - 11% sales growth in local currency and $3.01 to $3.06 earnings per share.
The firm is adapting business to consumer trends in the Emerging Markets Emerging Asia (EMEA) regions and is gaining traction from accelerated product innovation and incremental marketing. Increases in volume and product mix occurred the past three quarters.
Penetration of emerging markets increased led by gains in the Asia Pacific consumer business. The 109.5 percent increase in sales is mostly attributed to gains through acquisition. The firm would like to continue to expand the consumer business and the acquisition pipeline remains active.
In addition to margin compression, the risk/reward does not favor continuing to be bullish on McCormick. Per share value may increase to $59.40, a significant move beyond that level seems unlikely at this point. McCormick is rated neutral; a 20% increase in share price from the current level probably won't happen and more risk than reward remains at these levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.