McCormick (NYSE: MKC ) is a leading manufacturer in the spices, flavorings and seasoning business. Founded in 1889 and officially incorporated in 1903, McCormick has been able to attain considerable growth both organically and inorganically.
The company operates in two segments: consumer and industrial. The consumer segment of the company's business is its cash cow, as it accounts for approximately 60% of the company's revenues. Under this segment, the company markets its seasoning blends, marinades, extracts, herbs, sauces and specialty foods under a variety of brands, with Wal-Mart as its number one customer.
The industrial segment accounts for 40% of the company's revenue with its seasoning blends, coating systems, wet flavors, compound flavors, and natural herbs and spices offered to the company's multinational food manufacturers and foodservice customers, including PepsiCo, McDonald's, Yum! Brands, and Wendy's.
Taking a closer look
In the past eight years, McCormick has been able to consistently increase its revenue by an average of 6.4% year over year, with each year's revenue higher than the previous year's revenue. For example, the company reported revenue of $3.2 billion, $3.4 billion, $3.7 billion, and $4.0 billion for fiscal years 2009 through 2012.
There is a consensus revenue estimate of $4.2 billion for fiscal year 2013 and $4.4 billion for fiscal year 2014. McCormick is a company that has always delivered on revenue estimates, and as such, there is every indication that it will not disappoint as far as 2013 and 2014 revenue estimates are concerned.
It has also been able to expand its bottom line through a significant reduction in percentage of sales devoted to income tax expenses. For example, the income tax expense for fiscal year 2011 stood at 3.86%, but was reduced to 3.48% by the end of fiscal year 2012. This led to an increase in the company's net income, as it reported $407.8 million in 2012 compared to $374.2 million reported in 2011.
McCormick has also maintained consistent growth in terms of EPS. The company reported EPS of $2.79 in 2011, beating analyst estimates by 0.38%. In 2012, it reported EPS of $3.04, which was slightly below analyst estimates. The company's estimated EPS for fiscal 2013 and 2014 stands at $3.17 and $3.49, respectively.
With Asia Pacific accounting for only 10% of McCormick's revenue but holding huge potential, the company's management is working toward making the most of the impending growth in the region. In 2012 alone, the company introduced over 250 new products to the global market. This move is geared toward gaining more market share considering the shift in consumer behavior towards home cooking, which has in turn increased the demand for both company-branded and privately-branded spices and seasonings.
McCormick operates in a highly competitive industry with the likes of International Flavors & Fragrances (NYSE: IFF ) and TreeHouse Foods (NYSE: THS ) . Currently trading at a P/E ratio that is on par with McCormick's P/E ratio of 23.1, International Flavors is among the oldest companies in the U.S. With a net profit margin and a return on equity ratio that is significantly above the industry average, the company has done well for itself.
For the second quarter of fiscal 2013, the company reported net sales of $757.6 million, compared to $721.3 million in the same quarter of the previous year. It grew its bottom line from $88.5 million a year ago to $102.3 million for the second quarter. Operating profit increased 10% with diluted earnings per share at $1.24, compared to $1.08 from the previous year.
Having maintained five years of annualized EPS growth of around 10% and with its foot in emerging markets, International Flavors has great potential in terms of future growth. However, it needs to work on its bottom line considering that it shrunk year over year from $266.9 million to $254.1 million due to an increase in the percentage of sales being devoted to income tax expenses. Projected revenues for 2013 and 2014 stand at $2.9 billion and $3.1 billion, respectively.
TreeHouse came into existence in 2005 when Dean Foods decided to spin off its specialty foods group. In a bid to further increase the company's revenue and earnings, TreeHouse has made moves to acquire Associated Brands, which focuses on the manufacture of specialty teas, powdered drinks, and sweeteners. The deal, which is valued at approximately $180 million, is expected to help the company gain more market share in private label dry grocery and specialty tea products. The company's P/E ratio of 28.20 indicates it is currently trading at a premium in comparison to McCormick and International Flavors.
Headwinds facing the company's business
The headwinds facing McCormick's business include:
- Rising commodity costs
- Risk of currency fluctuation as a result of its international operations
- Few customers making up the company's customer base
Catalysts to further drive growth
With the economic downturn, there has been a shift in consumer behavior with a lot of U.S. and international consumers cutting down on discretionary spending, which is why they are dining more at home instead of eating out. This indicates improved sales of consumer spices and seasoning products.
The company's ability to rapidly expand into emerging markets, specifically India and China, will help to grow its market share with increased revenues. This strategy will also see the company outperforming its competitors by a high margin. For example, in fiscal year 2012, the company brought in revenue of over $4 billion, with 31% of the revenue coming from international sales.
Another catalyst is management's strategic operations. The company's management has been able to maintain healthy margins by minimizing costs. By doing so, the company has been able to maintain its top and bottom line growth. The company's EPS growth in the last 8 years attests to that.
When a company is able to consistently maintain and expand its existing market share in the industry it operates through acquisitions and strategic expansion moves and makes the most of the growth in the industry without denting its pricing power, there is no reason not to expect increased revenue as the years go by. McCormick is doing all of these things.
McCormick is a dividend-paying company with potential to continually increase quarterly payouts in the coming years. That makes it a safe bet that should be part of a well-rounded investment portfolio.