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McCormick: Is the Pullback Over?

GuruFocus.com
·3 mins read

- By Nicholas Kitonyi

The share price of McCormick & Co. Inc. (NYSE:MKC) edged 2.7% lower on Tuesday following the announcement of its third-quarter results. The decline added to the current bearish movement that dates back to the start of the month.

McCormick: Is the Pullback Over?
McCormick: Is the Pullback Over?


Shares of the company are now down nearly 10% this month. This trend appears set to continue given its current price level in comparison to the Peter Lynch earnings line.

Despite this month's pullback, McCormick is still up nearly 67% since bottoming on March 23. Its 16.5% gain this year also means that it is outperforming the S&P 500. This leaves little room to run as we edge closer to the tail-end of the year.

Highlights from recent quarter results

For the third quarter, the spice company posted earnings of $1.53 per share, which beat the consensus analyst estimate of $1.52. This was a significant improvement from the earnings of $1.43 per share posted for the same period a year ago.

The company's revenue also improved significantly to $1.43 billion, up from $1.33 billion year over year. This was also better than the consensus estimate of $1.39 billion. The company's top line was significantly boosted by consumer retail sales, which jumped 15% to $911 million amid Covid-19-related benefits. In comparison, McCormick's revenue from the flavor solutions segment declined 3% year over year to $519 million.

McCormick's gross margin for the quarter widened by 70 basis points to 41.3% due to improved product mix and the successful implementation of the Comprehensive Continuous Improvement program. This helped to cushion the company's profitability margins from the adverse effects of the pandemic.

Valuation

From a valuation perspective, shares of McCormick are trading at a trailing 12-month price-earnings ratio of 34.19. This is significantly higher than the price-earnings ratios of Baltimore-based household and personal products company Clorox Co. (NYSE:CLX), which trades with an earnings multiple of 28.63, while Hormel Foods Corp. (NYSE:HRL) and General Mills Inc. (NYSE:GIS) are priced at 28.56 and 16.06 times earnings.

When we factor in expected earnings growth for the next five years, McCormick appears to be competitively valued with a price-earnings to growth ratio of 2.03. In comparison, Clorox trades at a PEG ratio of 5.97, while Hormel Foods and General Mills are priced at 5.17 and 4.29.

In summary, given the current price of McCormick's stock relative to the Peter Lynch earnings line, there could be more pullback before the shares of the company make a real rebound. However, when we factor in expected earnings growth, the stock appears to be a compelling alternative for long-term growth investors.

Disclosure: No positions in the stocks mentioned.

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This article first appeared on GuruFocus.