Is Highly Valued McCormick Still Worth Buying?
McCormick & Company, Incorporated (NYSE: MKC) is a strong company with strong results. Not only is the business supported by pandemically-inspired soc...
Strong Results Lead McCormick Higher
McCormick & Company, Incorporated (NYSE: MKC) is a strong company with strong results. Not only is the business supported by pandemically-inspired social distancing and eat-at-home trends but it is also well supported by the rapid reopening of eating-away-from-home establishments. The problem that we have with McCormick, at least looking at the stock from the perspective of "is it a buy right now?", is that it's one of the most highly valued stocks in the consumer staples segment and pays one of the smallest dividends.
McCormick is trading near 30X earnings with a yield of only 1.5% while most others in the group trade at lower valuations and pay higher yields. Hormel has also been one of the highest valued Consumer Staples stocks since the pandemic began and it trades at 27X earnings with a 2% yield while Clorox and Kraft Heinz have even better yield-to-value ratios. Clorox, one of the biggest winners from the pandemic, trades at only 23X earnings and yields 2.6% while Kraft Heinz trades at 15X earnings and yields 4%.
The biggest difference is in the balance sheets, McCormick has one of the strongest balance sheets on Wall Street. The others aren't in danger of going bankrupt but none are quite as strong as McCormick, but there is an opportunity in that because they're all working hard to improve their balance sheets as well.
McCormick Results Prove Strength Of Underlying Trends
McCormick had a blowout quarter and one in which revenue grew sequentially, year-over-year, and beat the consensus. The $1.56 in net consolidated revenue is up 11.4% from last year and beat the consensus by 6%. More importantly, the revenue is up 20% over the past two years proving the company's revenue strength during the pandemic and the strength of trends in the wake of it.
Within that, the acquisitions of Cholula and FONA added 500 basis points of growth to the figure but even so the results are strong. On a segment basis, the Flavor Solutions segment which is focused on restaurants and institutions grew 39% while the consumer segment shrank by 2%. To keep things in perspective, the consumer segment grew 26% last year so the 2% decline is insignificant.
The only bad news within the report is that margins declined. The company's adjusted gross margin came in at 39.5%, down 190 basis points from last year on rising cost and weaker than expected. The mitigating factor is that revenue strength resulted in better-than-expected earnings despite the weak margins. On the bottom line, the GAAP $0.68 beat by $0.09 while the adjusted $0.69 beat by $0.07.
The Technical Outlook: Uninspired McCormick Market Drifts Sideways
McCormick is a strong company with a pretty good outlook for growth but it doesn't seem to be enough to get this market moving. The stock has been trending sideways for the last four months and looks like it will keep moving sideways for the near term at least. The Q2 results have the stock moving higher but not with any kind of conviction, at best we see the stock drifting up to the $200 level and then falling again under the pressure of profit-taking. Longer-term the stock is likely to move higher but it may take some time for the outlook in the market and the valuation to come back into alignment.
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