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McCormick Blew Past 2Q17 Estimates, but Stock Fell 3.6%

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Part 7
McCormick Blew Past 2Q17 Estimates, but Stock Fell 3.6% PART 7 OF 7

Is McCormick’s Premium Valuation Warranted?

Valuation summary

McCormick’s (MKC) 12-month forward PE (price-to-earnings) multiple fell on June 29, as the company’s stock fell about 3.6% following the fiscal 2Q17 results. However, the company’s current forward PE multiple of 22.5x remains higher than peers and the broader index.

The S&P 500 (SPX) and the Consumer Staples Select Sector SPDR ETF (XLP) were trading at forward PE multiples of 18.2x and 21.1x, respectively, on June 29, 2017.

Is McCormick’s Premium Valuation Warranted?

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As stated above, the company’s current valuation multiple is higher than the peer group average of 17.2x. General Mills (GIS), Conagra Brands (CAG), and J. M. Smucker (SJM) were trading at forward PE multiples of 17.7x, 19.2x, and 14.9x, respectively.

The 12-month forward PE ratio differs among peers based on several factors, including growth expectations, profitability, business model, capital structure, and risk-return profiles.

Growth expectations

McCormick has managed to deliver industry-leading sales growth despite the softness in the industry. The company was able to grow its business in the US where other food manufacturers are struggling. The company’s strategic initiatives to drive sales including pricing actions, acquisitions, new product introduction, expansion of distribution channels, and effective promotions have helped the company to accelerate top-line growth.

The company remains upbeat and expects to generate strong growth in the second half of the current fiscal year on the back of the drivers mentioned above. Analysts expect the company’s revenue to come in at $4.6 billion in fiscal 2017, reflecting YoY (year-over-year) growth of 3.6%. However, this is lower than the company’s guided growth range of 4% to 5% including the impact of currency headwinds.

As for the bottom line, analysts expect the company to report adjusted EPS (earnings per share) of $4.08, representing growth of 7.8% YoY. The company’s management is projecting its adjusted EPS to be in the range of $4.05–$4.13 for fiscal 2017.

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