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McCormick Tastes Like Success; National Beverage Chokes After SEC Concerns

Motley Fool Staff, The Motley Fool

In this segment from the Motley Fool Money podcast, we first break down an upbeat quarterly report from one of Jason Moser's favorite companies: spice giant McCormick (NYSE: MKC). Host Chris Hill and senior Motley Fool analysts Matt Argersinger and Ron Gross give him a backdrop to rhapsodize not just about the spice purveyor's excellent business model, but also about the smart moves it has made recently, including a major acquisition that is paying off even faster than originally predicted.

But in the world of investing, it's vital that we be able to trust the numbers companies report, and the Securities and Exchange Commission isn't entirely sure we can when it comes to National Beverage (NASDAQ: FIZZ), seller of sparkling water LaCroix, as well as classic soda brands Faygo and Shasta. In essence, the SEC suggested that the company was being a bit too creative in terms of the metrics it was using to describe sales growth -- possibly because the metrics themselves didn't have a clear definition. So, what should Foolish investors think about all this? The guys have some advice.

A full transcript follows the video.

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This video was recorded on June 29, 2018.

Chris Hill: Shares of McCormick up 10% this week. Spice maker's second quarter profits came in 23% higher than a year ago. Jason, I don't love this company as much as you do. I don't know anyone who loves it as much as you do. But, I mean, they're totally getting it done.

Jason Moser: I just wish, on one conference call, we'd have management say, "That was a spicy meatball!" or something like that. There are a lot of reasons to be enthusiastic about this business. I think the market's enthusiasm is based mostly on the fact that the RB Foods acquisition from a few quarters ago is proving to be the right decision, a smart decision, a good decision that the business is benefiting from.

If you look at the two segments the company operates in, the Consumer segment, which is what we stock our spice cabinets with, that grew 16%, with growth in all three regions; the Flavor Solutions segment -- which, man, I still love that renaming. It used to be Industrial. They call it Flavor Solutions now. Growth of 15% there.

I think the most encouraging thing is that the balance sheet, post-acquisition, that was one of the big question marks. It continues to strengthen. While operating income is covering interest expense about 6 times over, that will get better as time goes on, they've actually made $350 million in prepayments to the borrowing that they took out for this acquisition. They're going to pay it off ahead of time.

Then, from there on out, you have this company with some of the most powerful brands in flavor and spice around the world. Again, I say it every time, the value proposition? 90% of the flavor and only 10% of the cost of what you're eating, you just can't miss out on that.

Matt Argersinger: It's been amazing, given what we've seen with the rest of the consumer staples sector. McCormick kind of falls in that, and yet McCormick has defied all that. Do you think it's because they have such good brand placement on the high-end and low-end? So, they're not really suffering --

Moser: I think that's the key. A lot of people ask about, I go to the spice aisle, and I see all the McCormick stuff, but I'm going to buy this other store brand stuff -- well, that's the thing, McCormick has a lot of that store brand, private label business, as well. And when you look at French's and Frank's Red Hot and all of these different seasonings and flavors and spices, they just have such a big share of it all together. It's a tough thing to compete with.

Hill: Let's face it, there are a lot of companies that make a lot of acquisitions, and a lot of them don't work out. So, kudos to McCormick for, among other things, making the recent acquisitions work.

Moser: I think the skepticism, at least, on this RB Foods acquisition, initially, was warranted. It was a big deal, they had to borrow a lot of money to make it happen, but it's just proving to work out.

Hill: National Beverage is the parent company of several brands, including La Croix sparkling water. Shares of National Beverage fell 12% in two days after the SEC raised questions about the company's sales metrics. Ron, for background here, Nick Caporella is the CEO at National Beverage. He is known, among other things, for some creative, fun press releases. But I guess he got their attention when he started rolling out things like VPO, velocity per outlet. I don't even know what that means.

Ron Gross: [laughs] I love wacky CEOs, it's just so fun. Velocity per capita. They help National Beverage create growth "never before thought possible." What more do you need? Obviously, the SEC doesn't like that. It also doesn't like comments like, "VPO was flashing solid green numbers."

There's a lot of bluster there. I would warn investors to be careful of CEOs with a lot of bluster, that like to type in all caps. They're very promotional. To companies out there, if you want to use a metric, explain the metric or don't use the metric.

Here, they told the SEC to go take a hike, and that they didn't need to define the metric because it didn't really affect the company as a whole, it was just a goal set by certain customers. They, quite frankly, did not respond to the SEC, and it seems to have been dropped. But, be careful of bluster.

Hill: La Croix is the best-selling sparkling water in the country, so they have a little bit more going on than just bluster.

Gross: For sure they do. I'm not a fan of the stock at 27 times forward earnings when you have Pepsi and Coke at around 19-20 times. But, the growth probably is higher. But, there's a bit of a fad element going on here. I drink a lot of flavored seltzer. Those La Croix flavors are a little much for me personally, but they sell.

Chris Hill has no position in any of the stocks mentioned. Jason Moser has no position in any of the stocks mentioned. Matthew Argersinger has no position in any of the stocks mentioned. Ron Gross has no position in any of the stocks mentioned. The Motley Fool recommends McCormick. The Motley Fool has a disclosure policy.