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McCormick Stock Is Full of Flavor

Richard Saintvilus

NEW YORK ( TheStreet) -- Investors in the packaged food industry continue to starve for operational improvement. With weaker-than-expected earnings results and poor guidance coming in from ConAgra and Diamond Foods , I can't blame the Street for crossing these names off its shopping list. While the sector's overall performance has been hard to digest, McCormick , whose stock has been up on the year by as much as 20%, has been spicing things up with improved margins and solid returns on capital.

The problem is that despite McCormick's recent outperformance, the company just couldn't escape the wrath of a market that's ready to punish anything that carries a nutrition label. Consequently, since reaching a 52-week high of $75.26 per share in May, McCormick stock -- which has carried a higher valuation than both Nestle and ConAgra -- has lost roughly 14% due to weak growth prospects and poor volumes.

As much as I've wanted to like McCormick, its "non-discounted" price has always kept me on the sidelines even though the company holds about two-thirds of the market here in the U.S. for spices. But following this recent selloff, which occurred on the heels of the company's third-quarter earnings report, coupon or no coupon, this stock is now a must-own.

The Street believed McCormick's earnings results were a disappointment, seeing as the stock price had lost as much as 6%, falling to $63.38 last week. Since then, cooler heads have prevailed. And while the stock has recovered slightly, we can't ignore that in this weak macro environment where McCormick's rivals are not only missing estimates, but lowering guidance, the company's in-line results should -- in my opinion -- have counted as a beat.

Revenue grew 4% year over year, which is more than double the growth output of the company's June quarter. While it's true that much of this revenue was driven by the acquisition of Wuhan Asia-Pacific Condiments, which McCormick picked off in May, I was encouraged by the extent to which sales in the consumer business improved as the quarter progressed.

In the past, I've spoken about the importance of organic growth, which measures a company's operational performance using only internal resources and excluding events like acquisitions. As much as I've liked, say, Campbell Soup , I've taken issue with management's perpetual "growth by acquisition" strategy. I'm not going to change my tone on this. But by acquiring WAPC, which is a leading seller of products like chicken bouillon, I do see an exploitable advantage here for McCormick, which now stands to increase its sales in China by more than 60%.

To that end, the company's management is executing well on its three key growth initiatives, which includes growing the company's base business, becoming more innovative in product development, and expanding the company's brand portfolio and geographical presence through acquisitions.

What's more, it certainly appears as if the company's Comprehensive Continuous Improvement (CCI) program is starting to pay huge dividends. While CCI was initially met with some investor pessimism, the program, which was designed to cut costs and improve efficiency, helped grow the company's consolidated operating income by 3% to $148 million. This is even though there was a meaningful increase in the company's brand marketing expenses.

If there are any concerns, it's with the company's industrial segment, which supplies spices to (among others) McDonald's and Yum! Brands . At some point in 2014, I expect this area to show meaningful improvement.

That said, I would not wait to see improvement before buying this stock, especially with the holiday quarter approaching, which should spark more cooking. It's reasonable to expect that this should fuel McCormick's consumer business. And with improved volumes and growth prospects on the horizon in markets like China, this stock should trade at $75 per share in the next 6 to 12 months.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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