McCormick posts a third poor quarter Stock continues slide as profit of 52 a share disappoints analysts

'It's going to be tough'

More restructuring hinted

lagging units 'to be fixed orgone'

January 16, 1996|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

McCormick & Co. Inc. gave investors their third straight quarter of bad earnings news yesterday, and Wall Streeters who pushed the stock higher as recently as October continued to bail out of the market for shares of the Sparks-based spice company.

McCormick said it earned $42.2 million during the quarter that ended Nov. 30 -- at 52 cents a share, the results were more than 10 percent below the 58 cents analysts had expected -- and its shares fell as much as $1.375, to $20.375, before closing at $21.25, down 50 cents.

"We expected a sloppy number, and this number was even sloppier than we expected," said John McMillin of Prudential Securities Inc. in New York, one of the top food analysts. "A year ago, they took a restructuring [charge that has caused a reduction of about 500 jobs so far] and there's no sign of benefits."

McCormick's stock has fallen from $26.625 since October, even as a weakening economy has pushed more money into food companies' shares and other less cyclical stocks that Wall Street believes will bear up better during the slow economic growth forecast for early 1996.

McCormick shares trade for under 20 times the company's earnings in an industry where multiples range up to 29 times earnings for General Mills Inc. and 20 times or more for a range of food processors.

McCormick's top officials acknowledged that the results were disappointing, and conceded that they previously had expected the company's picture to brighten, beginning with the fourth-quarter report.

"We had a poorer performance than we hoped to have -- there's no doubt about that," said Robert G. Davey, McCormick's chief financial officer.

Mr. Davey said analysts' observations -- that McCormick's profit shortfalls could make Wall Street leave McCormick behind during stock gains for food companies as the economy slows -- are "not an unfair statement.

"I hope that we don't [get left behind]," he said. "It's still a tough market for us. In the near term, it's going to be tough."

Mr. McMillin and A. G. Edwards Inc. analyst John Bierbusse were harsher. Mr. McMillin called McCormick shares "dead money."

"I think it's time for them to put points on the board," Mr. Bierbusse said. "The numbers tell the story."

McCormick has been buffeted by two leading forces that cut its profit margins, before taxes and corporate overhead, to 35 cents on every sales dollar last year from 37 cents in fiscal 1994.

First, stiff competition from newer spice companies trying to cut into McCormick's top-rated share of the U.S. spice market led to heavier marketing expenses, especially for the company's new foray into radio and television advertising. Previously, McCormick had spurned most advertising in favor of store-based promotions.

Second, higher prices for key materials, such as cardboard and packaging, trimmed profits both in the consumer food business and in McCormick's smaller packaging business, which makes plastic bottles and containers for food companies, cosmetics firms and the vitamin industry.

"The consumer business is much larger than packaging, but packaging still had an impact," Mr. Davey said, pointing to 30 percent increases in the price of resin used to make plastic bottles and tubes.

While McCormick's situation is disappointing, it is hardly calamitous so far. Its sales were $556.3 million in the fourth quarter of its 1995 fiscal year and almost $1.9 billion for the year. Annual sales were up 10 percent over 1994.

A $70 million restructuring charge cut 1994's net income to 75 cents a share, well below the $1.20 a share McCormick reported for 1995. The charge represented 57 cents a share of potential 1994 pretax earnings, the company said.

But Mr. Davey said things are bad enough that McCormick plans to "get aggressive in management, more aggressive than we have ever gotten before." And he hinted that the reviews could lead to more restructuring.

"If we have businesses that can't cut it, we might deal with them some other way," he said, although he did not say which business units will be under the toughest scrutiny. "It's either going to be fixed or it's going to be gone."

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