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How McCormick’s Valuation Stacks Up to Peers

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McCormick trades at a significant premium

McCormick (MKC) was trading at a forward PE (price-to-earnings) multiple of 21.6x as of March 27, 2018, which reflects a premium of about 45% to the peer group average of 14.9x. McCormick stock is also trading at a premium when compared with the S&P 500 Index (SPX-INDEX), which was trading at a forward PE multiple of 17.1x. Notably, McCormick offers a higher sales and EPS growth rate than its peers and is currently trading below its historical average of about 23.0x.

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The forward PE multiple depends on the leverage profile of the company and growth expectations. Thus, a company with a high growth rate is expected to trade at a premium valuation. Moreover, the low valuation multiple for the company’s peers reflects a steep downtrend in their stock prices over the past several months.

On March 27, 2018, J. M. Smucker (SJM), General Mills (GIS), Kellogg (K), Kraft Heinz (KHC), and Conagra Brands (CAG) were trading at forward PE multiples of 13.6x, 14.2x, 14.5x, 15.9x, and 16.2x, respectively.

Growth expectations

Analysts expect McCormick to continue to generate double-digit sales and EPS growth rates in fiscal 2018. Analysts expect McCormick’s top line to mark 13% growth in fiscal 2018, which is significantly higher than its peers who are struggling to lift their sales amid low demand for packaged foods.

Also, analysts expect sales leverage, improving mix, and higher cost savings to drive the company’s bottom-line growth. Analysts project its EPS to register an increase of about 14% in fiscal 2018.

Moreover, McCormick plans to use the benefits from lower taxes to pay down its debt, invest in growth, and enhance shareholder value.

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