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Investors Who Overlooked the Food Sector Missed Out on McCormick

Amit Singh - Author
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Nov. 15 2018, Published 8:55 a.m. ET

McCormick outperforms broader markets and peers

With a YTD (year-to-date) return of 44.9%, McCormick (MKC) is currently the best-performing stock in the food industry. McCormick is bucking the sluggish industry trend and has outperformed the broader markets (SPY). The S&P 500 Index has inched up ~1% YTD.

In comparison, the shares of other major food companies the Kraft Heinz Company (KHC), General Mills (GIS), the Campbell Soup Company (CPB), Conagra Brands (CAG), the J.M. Smucker Company (SJM), and the Kellogg Company (K) have fallen 32.3%, 23.6%, 18.6%, 13.4%, 8.3%, and 8.1%, respectively, YTD. The Hershey Company (HSY) stock has fallen 4.9% so far this year.

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What’s driving the stock?

Stellar sales, margins, and earnings growth in recent quarters have instilled investors’ confidence in McCormick stock. McCormick’s top and bottom lines have marked double-digit growth in the past four quarters. McCormick is also the only food stock that has steadily expanded its margins despite pressure from higher freight costs. In comparison, other major food companies have struggled on the margin front and have been reporting sluggish margins.

McCormick’s top line is benefiting from incremental sales from its recent acquisitions. Meanwhile, its base business continues to grow at a healthy rate, which is encouraging. Strong sales and a portfolio mix shift toward value-added products are driving the company’s margins. Strong sales, higher margins, and a lower effective tax rate are cushioning its bottom line.

McCormick’s fundamentals look strong. However, we’re a bit cautious on the stock given its high valuation. McCormick stock is currently trading at a significant premium to its peers. The company’s current valuation multiple is ~21% higher than its historical average multiple.

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