McCormick’s Growth Is Not So Spicy

McCormick's-growthMcCormick & Co. (NYSE: MKC) has quite a history, having sold spices and seasoning for over 125 years. You’ve likely heard of some of their brands, beyond their flagship, although much depends on what part of the world you live in.
McCormick, Lawry’s and Club House brands are the most famous. However, you may have run across Zatarain’s, Thai Kitchen and Simply Asia. In the rest of the world, their products go by the names Ducros, Schwartz, Kamis, Vahiné, DaQia, Aeroplane and Kohinoor.
The company isn’t just a consumer seller, although consumers do account for 60% of sales and 80% of operating income. Wal-Mart (NYSE: WMT) accounts for 11% of sales in this category. The rest comes from industrial business sales. In case you were wondering, those “private label” brands you see at some grocery stores are often McCormick in disguise.
McCormick has always had to compete with other smaller players, since there are now over 250 brands of spices, herbs and seasonings sold in the U.S.

Competition and Raw Materials

The industrial business is pretty cool. McCormick has had many clients for decades, and the top three customers in fact account for 54% of global industrial sales. The division not only provides herbs and spices but also acts as a flavor house as well, doing sensory testing, culinary research, food safety and flavor application.
The uncertainty these days is what it’s always been, in that raw materials are tied to supply and harvesting conditions, which can cause large fluctuations in expenses.
The other problem is ongoing competition. People are crazy about healthy eating, so places like Whole Foods Market (NASDAQ: WFM) and farmer’s markets are likely taking away market share.
We see these effects in the quarterly results. McCormick showed net income of $84 million, or 65 cents per share, on revenues of $1.01 billion. Currency issues are eating away sales at every company these days, and McCormick is no exception. While it had a 5% increase in sales on a constant currency basis, it ended with negative 1% after accounting for the strong dollar.
The good news was sales in China saw increases in the high single digits, and there were double-digit increases in Mexico, Eastern Europe and Russia.

Earnings Growth?

McCormick is struggling, so it is looking to cut $86 million in costs this year and is on track to do so. Management believes it can grow sales in the range of 4% to 6%, in constant currency. That’s a solid number.
There are two pieces of bad news as far the stock goes. Last year the company earned $3.37 a share. This year it is only going to top out at $3.54, and that’s after adding back about $.29 a share in special charges for its cost cutting.
EPS growth of 6% is not interesting to me, and it is even less interesting with a stock selling at 22 times earnings. No way do I get involved here.
In fact, I am astonished that McCormick’s growth rate – or lack thereof –  is fetching this high a price. A 2% yield doesn’t make it any more attractive. So I’d even say, if you own it, sell it.

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