Spice and seasoning seller McCormick (NYSE:MKC) kicked off the first quarter of its fiscal year earlier this week. Sales growth was very encouraging and well ahead of historical levels, but profits fell, due to commodity cost pressures. Over the long haul, earnings growth has been firmly in the double digits, but the current valuation assumes many more years of similar growth trends.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

First Quarter Recap
Sales advanced 16% to $906.7 million on a combination of higher prices, improved volumes, more profitable product mix and acquisitions. The consumer business, which caters to individuals via grocery store chains, mass merchandisers, and warehouse clubs such as Kroger (NYSE:KR), Wal-Mart (NYSE:WMT), and Costco (Nasdaq:COST), grew 18% to $534.2 million, or just a hair below 60% of sales. The other division is called industrial and sells directly to food manufacturers and food service customers such as Kraft (NYSE:KFT) and Sysco (NYSE:SYY), which distributes to restaurants and food service firms. Industrial reported 13% growth to account for the remaining sales.


Despite the solid top-line growth, operating income fell 6.3% in the consumer business to $81.4 million. This still represented a solid operating margin of 15.2% of sales, but reflected inflation pressures on the commodities McCormick needs as raw materials to create its spices, seasoning mixes and condiments. The industrial business ended up reporting very solid operating profit growth of 31.2% to $31.1 million. This was attributed to its strong sales growth, as well as its cost-cutting moves and other operating efficiencies.

Total operating income improved 1.7% to $112.5 million, but lower net income from businesses where it only has some equity interest fell and sent net income down 3% to $74.5 million, or 55 cents per diluted share. (To know more about income statements, read Understanding The Income Statement.)

Outlook and Valuation
For the full year, analysts anticipate sales growth of nearly 9% and total sales of $4 billion. They project earnings of $3.05 per share, or annual growth of 9%. This puts the forward P/E at just below 18, or right at McCormick's average earnings multiple over the past five years.


The Bottom Line
McCormick looks expensive at the earnings multiple, but does have a very solid track record of leveraging mid-single-digit sales growth into double digit earnings growth. It has done so for the past three, five and 10-year periods. Over the past three years, sales growth has slowed a bit, with just over 5% annually, but profits are up close to 13% each year on average over this timeframe.

Combined with a current dividend yield of 2.3%, investors can reasonably expect double-digit total returns, though there is some risk that the multiple falls considerably should the company disappoint investors at some point going forward. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  7. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  8. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  9. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  10. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center