This Spicy Stock Isn’t Looking So Savory

by Lawrence Meyers | April 8, 2013 9:00 am

McCormick & Co. (NYSE:MKC[1]) is one of those household names you don’t really realize is a household name at all.

Just the other night, I was cooking dinner and reached into my spice rack. For the first time, I noticed that they were all McCormick spices. Intrigued, I decided to check and see whether or not the company is public.

Not only was the answer ‘yes,’ but McCormick has a market cap of nearly $9.5 billion. Who knew it was that huge? 

I sure didn’t. But the company — which got started over a century ago — is one of the world’s leaders for manufacturing, marketing and distributing spices, herbs, seasonings, specialty foods and flavors to the entire food industry. It makes everything from seasoning blends, natural spices and herbs to wet flavors, coating systems and compound flavors.

McCormick divides this into two business segments: consumer and industrial. The consumer business contributes 60% of sales and 79% of operating income and has a bunch of brands you’ll recognize besides the flagship: Lawry’s, Club House, Thai KitchenSimply Asia and over 250 more.

The industrial business, on the other hand, handles multinational food manufacturers and food-service customers, many relationships which have been active for decades. 

On top of that, McCormick is also a research facility. I’ve been inside one of these “Flavor Houses” before — although not McCormick’s — and it’s a fascinating blend of art and science. This company is one of the leaders.

Naturally, the great thing about being in the flavor business is that there will always be a need for things that taste good … and for new flavors to entice our senses. McCormick’s broadly diversified customer base — both retail and industrial — has secured them a position in this world.

Still, with that in mind, one would think McCormick’s earnings should be stronger. In the first quarter of the year, its revenue hit $934 million — a mere 3% increase — while its earnings per share only grew 3.6% to 57 cents per share. Demand from quick-service restaurants in U.S. and China hurt industrial sales, while the consumer side saw higher input costs (although they were offset by other cost savings).

Going forward, the company expects 2013 to yield earnings of $3.15 to $3.23 per share, which is about 6% growth. Unfortunately, that EPS growth will be driven more by cost savings than sales growth. Additionally, the company has put a $400 million repurchase plan into operation, which seems like a dubious use of capital considering it comes on top of the $165 million it paid in dividend payments and reflects much of the free cash flow.

With all this in mind, why are investors rewarding a company that has weak growth, a 1.9% yield and over $750 million in long-term debt with a multiple over 22? To put it simply, I have no idea.

Sure, McCormick is a household name and thus a stable company that’s not going anywhere soon. But the dividend isn’t high enough to keep income investors in it and the company is wildly overpriced.

With that in mind, this looks like one spicy bubble, which means only one thing: You should sell the stock now and maybe even consider shorting it. There’s nothing delicious to be had from McCormick at these levels.

As of this writing, Lawrence Meyers did not own a position in any of the aforementioned securities.

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