Can McCormick Spice Up any Portfolio?

By Ryan Guenette - September 2, 2012 | Tickers: CPB, CAG, HNZ, MKC, TSN | 0 Comments

• Email
• Print

One of the first products humans ever traded was spices. From the dawn of time, humans have had an urge to improve their food. Spices drove empires to drastic measures, as they were one of the most sought after products in the ancient world, and still are to this day.

Companies that have catered to the need for spices have struck it rich.  McCormick & Co. (NYSE: MKC) manufactures, markets, and distributes spices, seasoning mixes, condiments, and other products to the food industry, retail outlets, food manufacturers, and food service businesses. The company possesses distribution and production facilities in North America, Europe, China, Australia, Mexico, India, Singapore, Central America, Thailand, and South America. Over the past year, McCormick has rallied 37.95%, vastly outperforming the S&P 500, which has risen 25.60% during the same period. So can McCormick spice up any portfolio?

Zesty Fundamentals

In 2009, McCormick reported earnings per share of $2.27. In 2014, the average analyst consensus believes the company will derive $3.66 per share from its business operations. This represents a 61.23% increase in earnings per share over just five years. Based on these statistics, McCormick’s compound annual growth rate (CAGR) is 10.02%, a decent rate for a company of such magnitude.

McCormick’s growth is extremely consistent, rising nearly every year over the past decade. Since 2002, the company’s compound annual growth rate is 7.72%, a rate that the company should be able to sustain. The chart below displays the regularity that is seen in the company’s earnings.

Currently, McCormick pays out an annual dividend of $1.24, which at the current price puts the dividend as yielding 2.03%. This is up from 2011’s annual dividend of $1.12, and is further expected to expand. By 2014, the Street anticipates the dividend to reach $1.40 annually, which at current prices would put McCormick’s dividend as yielding 2.29%. From this we can see McCormick’s underlying financial strength, annualized high single digit growth rate over the past decade, and decently sized dividend that is growing at a moderate rate.

The chart below displays McCormick’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the foreseeable future.

Highly Competitive Food Market

The food market is a highly competitive one. Companies are constantly rolling out new products and items. To remain competitive, companies must innovate constantly. New fresh products allure the customers and boost sales. McCormick is essential to food companies in search of spicing up their original bland products. In many cases, McCormick’s spices are already used in their products. McCormick’s innovative flavors drive sales for companies looking for a boost in revenues, and keep customers coming back. For instance, Tyson and other companies that produce meat products sometimes season the product before selling it, many times with McCormick's products. By entering new emerging markets, McCormick will expand and grow its company, but does not necessarily have to expand its geographic reach to expand its sales.

Another advantageous aspect of McCormick’s stock is its steadiness. The company has a BETA of 0.44, representing that the stock is relatively stable, and is less likely to decline in an overall market selloff. Additionally, institutional investors strongly believe in the company’s strength -- 72.00% of the total shares outstanding are held by institutional investors, such as pension plans. This again speaks to the composure of the company’s stock.

Who Has a Monopoly on the Spice Trade?

Compared to some of McCormick’s most prominent competitors, all of which are related to or operate in the food industry, such as: H.J. Heinz (NYSE: HNZ), Campbell Soup (NYSE: CPB), Tyson Foods (NYSE: TSN), and ConAgra Foods (NYSE: CAG), McCormick compares relatively favorably.

In terms of growth, Tyson stands out to the upside, while Campbell’s is the industry’s laggard. All companies in the industry pay out sizable dividends, with ConAgra possessing the largest dividend and McCormick possessing the fastest growing dividend. In the fundamental ratio comparison, Tyson appears to be trading at a bargain, while ConAgra is a little pricey. When growth is taken into account, Campbell’s appears extremely pricey, while Tyson again appears to be the industry’s bargain. In the net profit margin comparison, Campbell’s stands out to the upside, while Tyson stands out to the downside.

The Foolish Bottom Line

Spices have been one of the most sought after items in the world since they were discovered and remain a crucial part of the global economic picture. McCormick is a trailblazer in the spice industry and should continue to be into the future. The company’s balance sheet is very strong, and the company’s earnings have been able to consistently grow over the past decade. Their dividend is not overwhelmingly significant, but is a little icing on the cake.

The highly competitive global food market will lead more and more companies to McCormick in search of a way to freshen and spice up their classic products. The Foolish bottom line is that McCormick has provided handsome returns to its investors in the past, and should continue to do so well into the future, and undeniably has the ability to spice up any portfolio.      

• Email
• Print
• Feedback