McCormick Looking Overcooked

By Ryan C. Fuhrmann | April 02, 2012 AAA

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.
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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.)

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

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