MKC - McCormick: Time To Buy

2023-10-03 10:57:44 ET

Summary

• McCormick & Company, Incorporated had 5.7% sales growth in fiscal Q3, driven by pricing power and strategic decisions.
• Margins improved by 150 basis points due to cost savings initiatives and pricing actions.
• McCormick & Company, Incorporated valuation has improved, making it an attractive time to start buying McCormick stock.

McCormick & Company, Incorporated ( MKC ) is a name where we have been waiting for a sizable pullback. We now have corrected nicely. We believe MKC shares are in a buy range. We think new money can start buying. We will discuss performance in Q3 and the outlook going forward.

McCormick Fiscal Q3 Sales

McCormick saw 5.7% sales growth in the third quarter (period ending August 31) from the year-ago period, with minimal currency impact this time around. The sales growth was a result of pricing power, as the company increased prices by 8%. This was partially offset by a 2% volume and mix decline. Most notably a slower recovery in China weighed. There was also the exit from the consumer business in Russia following the invasion of Ukraine.

The company has also made strategic decisions and asset sales which impacted the comps from last year, such as the Kitchen Basics divestiture. The company has been closing low margin businesses in an effort to trim the fat. Generally speaking, volume and product mix was flat to the third quarter of the prior year.

Consumer sales were up 1% overall, driven by 5% pricing action and 4% lower volume. Consumer sales in the Americas increased 1% from Q3 2023, or 2% in constant currency. Over in Europe, Middle East and Africa sales were up a strong 15% compared to the year-ago period, while sales for the consumer segment fell 16% in Asia, due to volume declines mostly stemming from China.

The Flavor Solutions segment saw sales increase 12%, or 11% controlling for currency. There was a 10% increase from pricing actions and 1% increase in volume. In the Americas, sales here were up 11%, while in EMEA, sales were up 17%. Despite consumer weakness, sales were also up 7% in Asia, or up 13% on a constant dollar basis.

Overall sales were about in line with expectations. Margins, however, are key.

McCormick Q3 Margin Power

Sales were relatively solid overall, but this is a real strength when we consider that expenses benefited thanks to cost savings initiatives put into place a couple of years ago as well as the sales of lower margin businesses. Margins jumped 150 basis points versus the year-ago period. This expansion was driven by pricing on top of the cost savings programs that were put into place.

Overall in Q3, operating income increased to $245 million compared to $235 million in the year-ago period. From an EPS standpoint, the company was in line with consensus . EPS came in at $0.65 per share. While it was a touch mixed, overall this was a good quarter. Shares have always been expensive, but valuation has improved drastically with today's decline relative to the forward look.

Valuation Has Improved

For the year, we think EPS now hits $2.65 depending on Q4, but the range is $2.62 to $2.67 expected. That puts valuation at nearly 26X FWD EPS at $71. The stock has always had a stretched valuation but usually in the high 30X range. Historically, this is attractive for how this company trades. We think it is time to start buying on this valuation.

Looking Ahead

McCormick & Company, Incorporated shares have come down significantly from recent highs. We think this is the level to start buying, at $71 and below. As we look ahead, we see the consumer business still adjusting to a post COVID world, where everyone was cooking at home. Business is robust, and restaurants are doing well and so the Flavors Solution segment has performed well. McCormick's stock is an ideal buy and hold for the long-term, and at these levels even traders can get excited about a short to medium-term bounce once we emerge from this seasonally weak period. We rate McCormick & Company, Incorporated shares a buy.

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