McCormick & Co. (MKC) is the leading global manufacturer, marketer and distributor of spices, herbs and seasonings. It serves restaurants, retail grocery chains and food processors and has about 40% of its sales in international markets.
I added MKC to my investment pipeline after reading a Morningstar article on “Two Stellar Consumer Firms." MKC traded between $41 and $43.5 over the last month.
Please refer to the stock review explained post if you have questions on what I look for in this analysis.
1- Business Performance Risk (=) and intrinsic returns (-)
Status | |
FCF / Sales | Last 12 Months: 8.7%, in line with historical performance of between 5% and 10% (a little less in 2001/2003) |
ROE | LTM: 26%, slightly ahead of the company's 5 year average of 24% |
ROA | LTM: 10.7%, ahead of the company's average over the last 5 years of 8.8% |
Revenue Growth | Over the last 5 years the company has been growing at close to 5% on average. This growth seems "stalled" with flat revenues both in 2009 and on a TTM basis. Over time MKC has been a bit volatile with years at 10%+ growth and a couple of negative growth years in 2002/2003 |
Cash distribution to shareholders | Dividend: MKC pays a 2.4% dividend yield on a payout of 35%-40% Stock repurchases: Over the last 5 years, MKC bought back ~3% of its shares Looking into what MCK has been doing with the rest of its cash, it seems that MKC has made a number of acquisitions over the years, including a $700M one in 2008 and has spent a lot of money buying back shares…probably to neutralize stock options since net buybacks appear to have been limited. |
McCormick seems to enjoy a high level of cash generation and ROE for a company that is in what looks like a commodity business at first. While the ROA is a bit lower than what I usually like, I don’t think it’s a problem as long as it doesn’t indicate too high of a leverage (let’s see below). I'm a bit concerned about where the money is going in this business. The company pays a nice dividend, but also buys back a lot of shares, which seems to be the exercise of stock options either to management or acquired businesses.
In terms of intrinsic stock returns, an investor would receive:
- 2.4% dividend yield using about 40% of earnings
- Growth rate of 5% (may be optimistic), using 20% of earnings (based on 25% ROE)
- Buybacks of 2+% based on current earnings yield of 5.7% and using the remaining 40% of earnings
This leads to total intrinsic stock returns of slightly below 10% (on good growth assumptions), less than my minimum target of 10%.
2- Balance Sheet Risk (-)
Status | |
LT Debt / Equity | 2.4x, much higher than my personal limit of 1.0x. |
Current Ratio | 1.2x, in line with previous years. |
MKC’s leverage is much higher than my comfort zone.
3- Valuation Risk (+)
Status | |
Cash Return | 4.1% |
Price to earnings ratio | MKC currently trades at 17.6x earnings, higher than the S&P's average but lower than the company's 5 year average of 20.0x |
While valuation is not stratospheric, it appears to be a bit high for a company’s whose growth seems to be stalled.
Conclusion
Overall I am a bit disappointed in MKC, which seems to have a decent underlying business but is using a lot of cash for acquisition and share buybacks, with yet to show real results for shareholders. Coupled with a high leverage and somewhat high valuation I think I will pass for now.
Disclosure: No position
