McCormick: Strengths, Weaknesses, Opportunities And Threats
Summary
- McCormick employees are allowed to own stock via their 401(K) plans allowing them a sense of ownership in what they are doing.
- McCormick commands a large and expanding global presence.
- McCormick understands that acquisitions and innovation will drive its long-term success.
Baltimore-based spice, condiment and flavoring giant McCormick (NYSE: NYSE:MKC) sells products crucial in making the necessary biological function of eating more pleasant. After all, what are mashed potatoes without gravy and toast without cinnamon sprinkled on top? I guess that's a matter of opinion.
However, just because a company sells an appealing food product doesn't necessarily make it a good investment. One of the best ways to objectively evaluate a company is to look at it from the standpoint of strengths, weaknesses, opportunities and threats. Let's take a look at McCormick.
Strengths
Employee engagement - I believe that any business worth its salt will take good care of its stakeholders, especially its employees. Employees who are well treated are more likely to invest themselves in taking care of the No. 1 stakeholder in any organization - the customer. McCormick exhibits evidence of an employee-centric culture. Employees are allowed to own company stock within their 401(k) plans. According to McCormick's latest proxy shares owned through the plan accounted for 19% of its common stock.
Employee engagement has a strong historical precedent according to Baltimore Magazine. During the great depression Charles McCormick Sr. took over the company when his uncle, the founder of McCormick, died in 1932. One of the first things he did was institute a profit sharing program and free holiday turkeys despite being called a communist by the business community in Baltimore.
Pro-active management - Engagement isn't confined to the rank and file. McCormick's senior management understands that apathy in the face of competition can mean death to a business. They are big believers in innovation and growth by smart acquisitions, more on that later.
Market leadership - McCormick commands roughly 22% of the herb and spice market worldwide. This means that the name McCormick gets a lot of eyeballs fortifying its brand name and scale. Companies with a great deal of scale wield a great deal of influence in terms of pricing power and shelf space. For example, Alan Wilson, McCormick's current CEO, had this to say about McCormick's influence on the economics of retail store clients in the gourmet product line in the most recent earnings call:
We're also leveraging our Gourmet re-launch to win at retail. Third-party analysis shows that greater product assortment is beneficial to the consumer shopping experience, but too many brands can be detrimental. Specifically, an increase in McCormick's gourmet product assortment led to an 8% increase in our sales and a 5% category increase. However, a shelf set with three brands resulted in a 13% drop in category buyers. The message for our customers is simple. Expand their product assortment of McCormick gourmet and discontinue competitive brands.
Consumer and industrial client base - McCormick caters to individual consumers as well as industrial clients such as restaurant chains. This gives the company underlying product diversification. According to Baltimore Magazine's website, individuals comprise about 60% of McCormick's revenue with the remaining 40% coming from the industrial segment.
Long-term debt - McCormick demonstrates prudence in managing its balance sheet. In the most recent quarter, McCormick reduced its long-term debt 7% year-over-year bringing it to 47% of stockholders' equity vs. 51% the same time last year. I like to see companies maintain long-term debt at 50% or less of stockholder's equity.
Solid dividend - McCormick's dividend represents another one of McCormick's strengths. I like to gauge dividend sustainability by comparing how much a company pays out in dividends vs. its free cash flow. Personally I like to see companies pay out less than 50% of their free cash flow in a full year. In FY 2014, McCormick paid out 52% of its free cash flow in dividends. Currently, the company pays its shareholders $1.60 per share per year yielding 2.1% annually.
Weaknesses
Strong dollar - This weakness has more to do with market perception than with the company's fundamentals. In McCormick's most recent quarter, a strong dollar shaved four percentage points off of the company's year-over-year top line growth. The casual stock market observer may panic and sell shares sending the company's stock price downward, especially if the dollar caused the company to lose the Wall Street expectations game. The strong dollar also contributed to a 25% year-over-year decline in McCormick's reported operating income in the most recent quarter.
Opportunities
Innovation - McCormick understands the importance of innovation. Keeping the final consumer interested by introducing new products is vital in any organization. According to Baltimore Sun's website,
Products launched in the past three years made up 8 percent of annual sales, and a third of new sales growth is expected to come from new products.
On Apr. 2, McCormick introduced 21 new products such as Grill Mates Belgian-Style White Ale Seasoning and Sugar Bourbon Seasoning.
Cost cutting measures - McCormick is always looking for ways to reduce costs. Reducing costs will become more important than ever as competition intensifies and large retail clients such as Wal-Mart (WMT) want to reduce costs as well.
e-commerce - McCormick also understands that people are buying more products online. It's making strides with Amazon.com (AMZN) gaining "4 share points" according to its latest earnings call. McCormick also reported that its Taco Seasoning Mix ranked in the No. 2 spot in Amazon Prime Pantry.
Brand Aromatics - McCormick isn't afraid to expand its business by making some strategic acquisitions. Brand Aromatics represents an interesting industrial move. It broadened McCormick's industrial product portfolio by adding flavors, broth, stock concentrates and marinades. More importantly, it gives McCormick access to more research and development human capital and infrastructure and a way to develop "Custom Flavor Systems" that could prove useful in thwarting moves from competitors. It gives McCormick a leg up in offering more to its industrial client base.
Drogheria & Alimentari- McCormick also bought Drogheria & Alimentari which is basically the Italian equivalent of McCormick. Drogheria & Alimentari supplies both brand and private label seasoning and holds a 33% market share in Italy.
Mexican JV - According to its most recent earnings call, McCormick is experiencing success with its Mexican joint venture, McCormick de Mexico, with sales increasing 7% in the most recent quarter vs. the same time last year. McCormick said higher income from unconsolidated operations contributed to a 13% expansion in earnings per share excluding special charges vs. the same time last year. This joint venture will give McCormick a foothold in Mexico.
Expanding Chinese footprint - McCormick was proud to report double digit sales in China in the most recent quarter. Interestingly the company is making headway with local restaurant chains which means it is building a rapport in that vast market. McCormick's slide presentation quoted Euromonitor International in predicting that sales in the herbs and spices category will grow 9% per annum over the next five years in emerging markets vs. 4% in developed nations during the same time frame.
Threats
Competition - McCormick is facing intensifying competition on multiple fronts. Wal-Mart is throwing its weight around with its private brands. Also, the collective consumer is showing more loyalty to popular store brands such as Trader Joe's. You are hard pressed to find an extensive presence of a national brand name in a Trader Joe's and that includes McCormick. People still happily and cheerfully shop there despite this fact.
Thoughts on the future
Long-term catalysts such as an emerging global middle class and the rise of the millennial generation to economic relevance will contribute to McCormick's long-term success. However, McCormick needs to remain diligent in combating the private label competition through innovation and strategic and relevant acquisitions. Currently, the company is trading at a P/E ratio of 26 vs. 19 for the S&P 500 making it a little overvalued. Prospective investors may want to add this company to their watch list and wait for a correction before buying.
This article was written by
Analyst’s Disclosure: The author is long MKC, WMT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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