McCormick & Co. (MKC): Zacks Rank Buy

Zacks

Shares of McCormick & Co. (MKC) hit a fresh 52-week high of $63.91 on September 12; about 2 weeks before its solid third-quarter results. This global leader in spices and flavors announced a positive earnings surprise and year-over-year revenue growth for the period. With a decent dividend yield of 2.0%, upward estimate revisions and year-to-date return of 21.7%, this Zacks #2 Rank (Buy) is a solid pick for investors seeking both growth and income.

Strong Third Quarter

On September 27, McCormick announced third quarter earnings of 78 cents per share, beating the Zacks Consensus Estimate by more than 2.6% and improving on last year's performance by 13%.

Total revenue grew 6% year over year to $978 million. Half of the increase was contributed by acquisitions completed in 2011. McCormick's price increase in response to high input costs also contributed to overall revenue growth. On a constant currency basis, revenue advanced 9%.

Despite high material costs, gross margin expanded 50 basis points to 40.1% in the reported quarter, owing to higher sales. Operating income increased 12% to $144.0 million, driven by favorable impact of higher sales and cost savings under the company's Comprehensive Continuous Improvement (CCI) program.

Dividend Payout

McCormick paid a dividend of 31 cents per share in the third quarter, reflecting a decent annual dividend yield of 2.0%. McCormick increased its quarterly dividend per share to 31 cents from 28 cents in November 2011, representing its 26th consecutive year of dividend hike.

Reasonable Guidance

McCormick expects to grow sales, generate cost savings, invest in brand marketing support and deliver solid profit growth, despite a difficult global economic situation and volatility in material costs.

For fiscal year 2012, management expects earnings between $3.03 and $3.08 per share. Sales are expected to grow by 9% to 11%, which includes an expected 4% tailwind from the acquisitions completed in 2011. The company, however, expects foreign currency exchange rates to lower sales growth by 2%. McCormick also reaffirmed its operating income growth range of 9% to 11%.

Earnings Estimates

Over the past 60 days, the Zacks Consensus Estimate for fiscal 2012 increased 0.98% to $3.08 per share, indicating year-over-year growth of 8.3%. The Zacks Consensus Estimate for fiscal 2013 remained static at $3.35 over the same period, representing growth of 9.0%.

Expensive, Yet Justified, Valuation

McCormick currently trades at a price-to-book (P/B) multiple of 4.73x, reflecting a 154.3% premium to the peer group average of 1.86x. The P/S multiple for the stock is 2.05x, which is at a slight premium of 133.0% to the peer group average of 0.88x. However, the stock is justified as it has a trailing 12-month return on equity (:ROE) of 23.8%, which is above its peer group average of 11.8%.

Chart Showing Consistent Advance

Shares of McCormick have been consistently rising since May 2012, given its strong brand portfolio coupled with acquisition benefits. Moreover, the stock is currently trading above its 200-day moving average, which stands at $56.78. It is slightly below its 50-day moving average of $62.09. Volume is strong, averaging roughly 369K daily. McCormick has outperformed the S&P 500 in the last 6 months. The year-to-date return for the stock is 21.7% compared with the S&P 500 return of 12.7%.

Based in Sparks, Maryland, McCormick & Co. engages in the manufacture, marketing, and distribution of spices, seasoning mixes, condiments, and other flavorful products to retail outlets, food manufacturers, and foodservice businesses. The company currently has a market cap of $8.15 billion.


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