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Summary

  • McCormick has the right plan in place.
  • The company is likely to generate sustainable growth.
  • McCormick is a perfect stock for defensive investors.

Over the past few years, the food sector has experienced volatile commodity prices which have led to fluctuating margins and profitability. McCormick & Company (NYSE:MKC) is among those companies which have been proving their entity as defensive investments for investors mainly because it has the ability to prosper in any business environment. With the emergence of private labels and increased competition, the packaged food industry sales have started declining and margins have also started trimming. This has impacted a number of other companies but McCormick has put in place the right plan at the right time to cope with these headwinds.

The company wants to generate a consistent mid-single digit growth in its top-line and a double digit growth in its earnings. With the intention of making a consistent growth in its top-line, McCormick has a plan in place which continues to work for the company. The plan is simple: sales growth targets are projected with one-third of that coming from category growth, new distribution and share gains; another one-third coming from acquisitions and, finally, one-third coming from product innovation. The company is strongly working on its plan. As of 2013, the company had generated revenue of $4.12 billion compared to the $4 billion in 2012. And in the first six months of 2014, it has generated a sales growth of 5% as compared to the first half of last year.

Both of its consumer and industrial businesses have gained momentum with new innovations, acquisitions and share gains. The company has been generating very strong growth in the emerging markets, particularly in China and Asia-Pacific. In the most recent quarter, its consumer segment sales were up by 70% in China and Asia-Pacific on the back of a new product, the WAPC acquisition and an expanded distribution. Europe, Middle East and African regions have also added a 7% growth in the recent quarter whereas sales in Americas have declined by 5% driven by strong pricing pressure and increased competition. Similarly, its industrial business has generated a strong growth in the international markets, while having a decline in Americas.

On the whole, its top-line growth was standing at 5% in the most recent quarter. McCormick is further supporting its margins with its Comprehensive Continuous Improvement [CCI] program. It intends to save around $45 million through the CCI program so as to enhance its margins and support its cash flows. However, the company is not compromising on the advertising and marketing expenses. It continues to spend on advertising and marketing campaigns as it intends to sustain and increase their market share. Between 2005 and 2012, the company doubled the brand marketing support and reached spending of around $13 million in 2013. I believe McCormick has adopted a perfect strategy and the management is strongly implementing strategic initiatives.

The outcomes from this strategy are within expectations. In the most recent quarter, McCormick has posted an 8% growth in its earnings per share and a 9% increase in the past six months as compared to the past year. Strong and consistent growth in its top and bottom line has been enhancing its cash generating potential which has allowed it to pay dividends over the past successive 90 years. In the past six months, it had paid $223 million in dividends and buybacks which represent a 22% increase over the last year. Its operating cash flows are adequately covering its dividend payments and capital requirements. In the past six months, its operating cash flows came at $182 million while the capital expenditure was at $47.4 million resulting in huge free cash flows of $135 million.

Before making any conclusion, I must look at the potential risks that the company has to face going forward. The McCormick business model is strong and the company has a presence in the markets of 125 countries. Furthermore, its diversified portfolio, global footprints and product mix allows it to gain market share. This reduces the impact of economic and political impact from any country in particular. Moreover, the company has a right plan in place to sustain growth. Also, the company has strong cash flow generating potential which shows that the company has no risk of solvency.

In Conclusion

McCormick & Company is heading in the right direction. The company has potential to generate sustainable growth both in its top and bottom line. Also, its cash flows are covering dividends and capital requirements. It is in a position to maintain its precedent of increasing dividends. McCormick is the perfect stock for defensive investors with hefty dividends and steady price appreciation.

Source: McCormick & Company: An Astute Investment