If investors want to find a bargain in packaged food, they have little choice but to go with small up-and-comers that aren't fully appreciated yet or dip into the box of broken toys. Companies like Kellogg (NYSE:K) and Kraft Foods (NYSE:KFT) offer some potential on the basis of past missteps and/or restructuring potential, but a well-run company like McCormick (NYSE:MKC) doesn't come cheap these days. Although I believe there's still upside to the McCormick story, these shares aren't priced to permit many mistakes.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Q2 Results on Track
McCormick's fiscal second quarter results were basically as expected, and that's OK given that the Street expected pretty solid performance. Revenue rose 11% on a reported basis, with about half of that coming from acquisitions.

SEE: Analyzing An Acquisition Announcement

McCormick's industrial business saw about 10% organic growth, with consumer growth of around 5% (again, organic) as the company saw mid-single digit price growth and minimal volume loss.

McCormick was a bit wobblier on the margin lines. Gross margin slipped about 20 basis points from last year and was a little weak relative to Street expectations. Likewise operating margin came in a little short of expectation (and dropped 10bp from last year), but 11% growth was still a solid outcome.

SEE: Understanding The Income Statement

Going Aggressive While Many Play Defense
McCormick is a curious company, in many respects; one example is the relative aggressiveness of management today. Not only is the company looking to build its geographic footprint (not really an unusual stance today), but it is also looking to enter markets like frozen foods at a time when players like ConAgra (NYSE:CAG) and Heinz (NYSE:HNZ) seem to be back on their heels a bit. The size of this market makes it a worthwhile target, though, and building a brand like Zatarain by covering more product categories, does make some sense.

McCormick is also actively looking to grow across the globe. While companies like General Mills (NYSE:GIS) and Kellogg are pretty focused on emerging market growth, McCormick is not forgetting about Europe. Still, emerging markets are a major focus and acquisitions like Kamis and Koohinor should help boost the company's presence in Eastern Europe and India.

The Bottom Line
If there's a big problem with McCormick, it's that Wall Street loves the name and expects quite a lot already. Trailing EV/EBITDA multiple is just one metric (and a limited one at that), but comparing McCormick to General Mills, Kellogg, Kraft and even Nestle shows McCormick to be one of the most highly-valued food stocks out there. This is backed up by cash flow as well, as McCormick would seem to have among the lowest appreciation potential, based on cash flow.

SEE: 5 Must-Have Metrics For Value Investors

I understand why McCormick is in favor. The company is holding onto volume at a time when many others are losing substantial volume and there aren't a lot of generic/private label options in the spices and seasonings aisle. What's more, management plays things pretty straight and hasn't given the Street any reason to really doubt them.

With all of that said, I understand why investors would hold onto these shares. While I do believe McCormick has good growth potential from international growth, new product introductions and brand extensions, I believe today's price already assumes that a lot of these go well. At a lower price I'd love to buy McCormick, but it looks like I'll have to wait a while for that to happen.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  2. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  3. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  4. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  5. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  6. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  7. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  8. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  9. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  10. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
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 formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  3. 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 >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. 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 >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!