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McCormick: This Global Leader In Flavor Can Spice Up Your Portfolio

Beulah Meriam K profile picture
Beulah Meriam K
3.29K Followers

Summary

  • McCormick has strong organic and acquisition-based growth ahead of it.
  • The balance sheet is healthy despite the surge in debt, and is manageable enough for the company to continue increasing dividends and service its debt.
  • McCormick is also keenly aware of and is addressing the changing needs of the market - healthful options like non-GMO and low-sodium as opposed to traditional flavorings.
  • There's a slight premium on the stock at its current price point, but that doesn't mean you have to wait to get in.

McCormick & Company (NYSE:MKC), the global leader in the flavor market, is currently trading at a slight premium based on multiple types of valuation analyses. The market expects rapid growth, but much of the current growth comes from past acquisitions. Do past performance, the state of the balance sheet and other factors like industry estimates and current acquisitions lead to a buy recommendation at this price point?

McCormick adequately addresses current trends in food consumption, such as the growing need for non-GMO, low-sodium, gluten-free and organic alternatives to traditional condiments, spices, seasonings and other flavor-related products. It also operates in a wide price range straddling everything from value-priced goods to premium offerings.

The higher-margin consumer segment brings in the lion’s share of the company’s revenues, accounting for 61% of sales in 2017, while the industrial segment accounted for the other 39%. The former accounted for nearly 72% of operating income during the period.

Source: McCormick

McCormick’s consumer brands have a well-established presence and reach customers in more than 150 countries around the world. Nearly half of all consumer segment sales are derived from spices, herbs and seasonings, a niche segment within the food industry. Though there are several competitors in the segment, the company’s focus on spices, herbs and seasonings differentiates it from much of the competition, and the outsized role that flavor plays in its overall earnings story will continue in the future as well.

Market Conditions

This niche focus has turned out to be a significant advantage for the company as current market conditions remain favorable for its future growth. According to data from McCormick the global demand for flavor products is expected to grow at a CAGR of 5% over the next five years.

Source: McCormick

How does that future stack up against the company’s historical performance?

This article was written by

Beulah Meriam K profile picture
3.29K Followers
I do deep-dive analyses into the top companies in multiple segments, including retail, consumer goods and technology.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (17)

No Guilt profile picture
Pretty funny that you recommend it yet you don't own it.

You recommend a small purchase but still don't even own it.

Is this the alternative to fantasy football?
allday1234 profile picture
While you may disagree with the Contributor owning or not owning a security there is also another argument that supports the discussion.
If the person in question owns a security and has had good success with it, that alone does not mean it is a good investment, but only successful to them. In many cases a study other than that of the individuals success would have pointed that out. I find that in many cases an individual who has no ties to an individual investment in many cases would have an unbiased view of the security itself and has made their observations on the viability of that security and it's further success or failure going forward. A case in point without mentioning an author's name because it is unfair, an author has promoted a stock and has owned a stock and has watched his investment sink to less that 1/3 of what it was while still promoting it.. I will only say it is a REIT. I personally escaped as I have set my own limits for negative share price. While this in some cases may prove to be not true, i my view why write about it without the study that went into it.
But like everyone else who posts comments it is only my personal view as everyone is totally entitled to make their own judgment.
As far as MKC goes I have been an owner since Dec. of 2014 and I am up growth wise 48% on 500 shares and my only complaint is that the dividend has not increased at the rate I would have liked it to. However I can say that about many of the 55 dividend positions I own.

Allday
David J Lau profile picture
Using the average of past 3 years of FCF as your starting point is too conservative no? And it doesn't take into account the one time boost from the tax reform. Forward earnings in 2018 is estimated to be 36% higher than in 2017
F
Would love to add in the low 90s / high 80s, but am in no rush. I got many decades of holding this fantastic company ahead of me.
spiritofemerson profile picture
Automatic MKC monthly purchases + đź’§, đź’§, đź’§ = long term wealth.
Searching for Awe profile picture
Great company.
allday1234 profile picture
If you don't own it you are missing out my gain is 47%

This of course does not mean it is the right stock for everyone.

Allday
Why would it offer margin of safety @ $87? Intrinsic value isn’t even above stock price. Thanks.
G
Beulah, I second Ethan's comment. The stock price has to be below the Intrinsic Value for a MoS to exist. I get your point though that if someone seeks to invest in this company with a MoS, and agree to your DCF assumptions, they would need to purchase below $87.22. The target purchase price will depend on how much MoS they desire. For example, if I require a 10% MoS, 78.50 would be my target price.
Beulah Meriam K profile picture
Ethan, you're right. That was worded incorrectly.
I Love Hamburgers and Coke profile picture
Great Company...but the stock is over priced and not a buy here. On my watch list and when it drops about 20% I'll take another look.
H
A very nice article on MKC, a stock I have owned for about 20 years and occasionally added more shares to my initial investment. I am well satisfied with this investment which (as you pointed out in this article) will do well in the future. I do have one fault, why didn't I buy more when the stock price was much lower.
Beulah Meriam K profile picture
Thank you, Herbert.
gldhwk profile picture
"NEVER wait to make your initial buy or you'll never get in."

Some of my best results have come about by doing this. I purchased 10 shares of ADP in 1988 and never added to it. What I have found is that paying too much, over time, is not too bad of a thing!
h
@ gldhwk

its about the opportunity cost. Instead of buying MKC which i feel is overvalued, i bought BA a couple of years back @ 100. My investment is over 3 times now.
R
Nice article but you Didn't really touch on divided growth or expectations for divided raises which seems to be a large reason to own the stock.
h
not at this price
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