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Alan D. Wilson, chairman and CEO of McCormick, speaks in March 2015 at the company's annual shareholder meeting. (The Daily Record / Adam Bednar)

JPMorgan downgrade clouds McCormick’s 4Q earnings call

As McCormick & Company CEO Alan Wilson does his last earnings call next week, he may feel the need to address a recent downgrade of the company’s stock by JPMorgan Chase that cited sluggish earnings growth.

“Our downgrade is largely because we think Street estimates and valuation multiples are a bit too lofty,” JPMorgan analysts said in a report released Jan. 19.

Despite the downgrade, analysts still see McCormick as an “iconic” brand in a strong spices category.

“Our problem is not with the company but with earnings estimates and valuation multiples,” the report said.

Morgan also reduced their price target for December 2016 from $82 to $76, based on an analysis of all packaged food companies the analysts assess.

Even though incoming CEO Lawrence Kurzius is from within McCormick, analysts said a new CEO still adds some uncertainty.

“We know Mr. Kurzius and find him to be quite capable. In our experience, however, sometimes new managers like to set expectations somewhat lower than they normally might in order to establish more reasonable and/or achievable targets,” analysts said in the report. “Also the mere presence of a new CEO adds a level of uncertainty to the story, simply because we do not yet know whether he will change the company’s strategies in any way.

Karyl Leggio, finance professor at Loyola University’s Sellinger School of Business, expects Wilson will address the Morgan report during next week’s earnings call.

“Hopefully he can reiterate the strength of the company,” she said.

However, a downgrade from one analyst isn’t a reason to panic. In fact, Leggio expects the call to be largely uneventful.

“I wouldn’t take one company’s downgrade too seriously,” she said, adding that the business news for McCormick will be if it can can beat analysts’ expectations despite the Morgan downgrade.

Kurzius is taking over for Wilson on Feb. 1. His appointment was announced in December. Kurzius is a board member and former CEO of Zatarain, which is now owned by McCormick. Wilson, who is also currently president and chairman of the Hunt Valley-based spice maker, will stay on as executive chairman of the board.

In the future, there could be some raw material inflation due to a 15 to 20 percent decline in black pepper production, which makes up less than 10 percent of McCormick’s products. The price of pepper has been increasing and analysts expect McCormick to increase pricing even though gross margins tend to be negatively correlated with an increase in pepper prices, the report said.

McCormick also relaunched its gourmet line last year, which has done well and will likely do even better this year, the report said.

The Jan. 28 earnings call will be webcast at 7:30 a.m.