McCormick Is Strong, but Current Valuation Remains a Drag

McCormick stock has risen 7.2% YTD

The food industry is witnessing a slowdown, which is reflected in the stock prices of food manufacturers. Most companies operating in this space have generated negative or low returns on a YTD (year-to-date) basis as of April 6, 2017. But McCormick (MKC) stock has had healthy returns compared to its peers and the broader index.

McCormick Is Strong, but Current Valuation Remains a Drag

McCormick stock has risen about 7.2% YTD as of April 6, 2017, reflecting the company’s ability to drive sales despite a softness in the industry. A strong product portfolio, a focus on lowering costs, new product launches, and strategic acquisitions are helping McCormick generate strong sales and margins.

Peer comparison

The above graph shows that YTD, McCormick stock has outpaced its peers. But it has generated better returns compared to the broader index. As of April 6, 2017, General Mills (GIS), Kellogg (K), JM Smucker (SJM), and ConAgra Brands (CAG) returned -6.6%, -1.8%, 1.1%, and 2.4%, respectively.

The S&P 500 (SPX) and the Consumer Staples Select Sector SPDR ETF (XLP) have generated returns of 5.3% and 5.5%, respectively.

Positives priced in

Despite McCormick’s strong fundamentals, industry-leading growth, and ability to generate healthy cash flows, analysts remain on the sidelines. They believe that most of the positives are already priced in and that challenges persist due to a weakness in the overall industry, which could limit the stock’s upside. Also, McCormick stock is trading at a premium compared to its peers. We’ll look at that in detail later in this series.

About McCormick

McCormick is a leading producer of spices, condiments, seasoning mixes, salad dressings, and other products that enhance food flavors. The company operates through two business segments: Consumer and Industrial.

Its Consumer segment accounts for about 60.0% of the company’s sales and 75.0% of its operating income. Through this segment, it sells its products to food retailers, including mass merchandisers, grocery retailers, warehouse clubs, and discount stores.

The Industrial segment represents 40.0% of McCormick’s top line and 25.0% of its operating income. The segment caters to the needs of food manufacturers and other businesses engaged in food services.

Series overview

In this series, we’ll focus on McCormick’s fundamentals and its strategies to drive sales and margins growth. We’ll also look at the company’s dividend history, valuation, analyst recommendations, and outlook.

Let’s start by looking at McCormick’s long-term growth projections.