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Is It Time to Exit McCormick Stock?

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  • McCormick stock has risen on the company’s stronger-than-expected earnings and higher guidance.
  • The surge in McCormick stock could offer an exit opportunity.

McCormick (MKC) posted mixed third-quarter results yesterday. The company’s top line improved YoY (year-over-year), but its revenue fell short of analysts’ estimate. McCormick stock closed 6.8% higher yesterday thanks to the company’s better-than-expected earnings and upbeat outlook.

McCormick’s bottom line grew by a double-digit percentage, beating analysts’ estimate by a wide margin. Moreover, management raised its full-year earnings outlook, further boosting investors’ confidence.

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The third quarter in brief

In the third quarter, McCormick’s revenue grew 0.8% YoY to $1.33 billion. However, its revenue missed Wall Street’s expectation of $1.34 billion.

The company’s consumer sales increased by 2.8%, driven by higher volumes, product launches, and brand marketing, and slowed by currency rates. Flavor Solutions revenue fell 2%, reflecting weak volumes, currency volatility, exits from narrow-margin businesses, and promotion timing.

In the third quarter, McCormick’s adjusted gross margins expanded by 100 basis points, reflecting a favorable product mix and cost savings. Meanwhile, its wider gross margins and lower selling, general, and administrative expense rate (-60 basis points) expanded its adjusted operating margin by 160 basis points.

McCormick’s adjusted EPS rose about 14% YoY to $1.46, easily beating analysts’ estimate of $1.29. The company’s wider margins and lower interest expenses and effective tax rate boosted its earnings higher. Its adjusted effective tax rate was 120 basis points lower in the third quarter. McCormick raised its fiscal 2019 adjusted EPS outlook from $5.20–$5.30 to $5.30–$5.35, which implies 7%–8% YoY growth.

McCormick stock’s high valuation and low growth a concern

Several analysts raised their target price for McCormick stock after the company’s third-quarter results and EPS outlook increase. However, as McCormick stock has risen about 20% this year (including yesterday’s gain), its recent surge could be an opportunity to exit it. McCormick stock’s valuation looks unattractive, and we expect the company’s sales and earnings growth to moderate in fiscal 2020.

McCormick stock trades at 29.7 times analysts’ forward earnings estimate, significantly higher than peers’ average of 17.1x. MKC stock also trades at 22.1x its forward enterprise value-to-EBITDA multiple, nearly double peers’ average of 11.6x.

Historically, McCormick stock has traded at a premium to its peers. However, given its low EPS growth projection, its current valuation looks expensive. Analysts project McCormick’s bottom line to increase by a mid-single-digit percentage in fiscal 2020.

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