Is McCormick a Bargain After Its Q4 Stumble?

Even a solid performer can have a less-than-stellar quarter now and then. The question that serious investors should be looking at in those cases is: Was this an anomaly, or the start of a trend? In the case of leading spice maker McCormick (MKC 0.34%) (MKC.V 0.84%), it just missed the market's expectations for its fourth quarter, and its 2% sales growth was a disappointment compared to the 4% it has delivered for past several quarters. Investors reacted strongly, sending the stock lower. So, what happened?

In this segment from Motley Fool Money, host Chris Hill and senior analysts Aaron Bush, Ron Gross, and Jason Moser unpack the report, consider the nature of the headwinds the company faces and its strengths, and discuss the underlying investment thesis.

A full transcript follows the video.

Check out the latest McCormick earnings call transcript.

This video was recorded on Jan. 25, 2019.

Chris Hill: Shares of McCormick falling 13% this week. Fourth-quarter profits and revenue came in lower than expected for the spice maker. Jason, this was the stock on your radar last week. Kind of a surprising miss for them.

Jason Moser: Wait a minute, I thought we were going to Ron with this?

Ron Gross: [laughs] Covering McCormick? Pass.

Moser: [laughs] You've always loved this company, right? No, OK, listen. Let's remember, there's a big difference between a bad quarter and missing some set of arbitrary expectations that's established by people who don't have anything to do with the business.

Gross: Spin.

Moser: This was a good quarter. They missed expectations on the operating profit side. They did hit their revenue target that they re-established last quarter. Let's also remember that 2018, while the market was down, McCormick was on fire.

Now, with that said, there are reasons to be a little bit down. Looking forward, they did note a large retail partner's disruption in its replenishment system, its inventory system. That's a headwind they're working through. And, again, let's face it, the stock wasn't cheap to begin with. But they continue to establish a very large global presence. They're opening a new manufacturing and distribution facility in Thailand very soon. Far ahead of schedule in repaying the debt for this RB Foods deal. That RB Foods deal is a done one, it's a good one, and it's paying dividends in a big way. Speaking of dividends, they just raised their dividend for the 33rd consecutive year.

Remember, you're not owning the stock for its high-flying growth prospects. You're owning it for its market-dominating position and reliable dividend. It's one of those that you can hang on to for a long period of time. I told people that were asking me on Twitter about this this week. This is a gift. If you had interest in this company, this sell-off is one where you get to take a close look. At 22 times full-year estimates, the market has already shown it will pay a higher multiple for a company that's leading in its space.

Hill: One other thing they have going for them, and it's one of those things that doesn't show up on the balance sheet, I have no idea who their main competitor is. Who is the Pepsi to their Coke?

Moser: That's a very good point. There really isn't an obvious one. A lot of people will ask the question, what about the generic offerings you see in grocery stores and whatnot? The thing is, McCormick owns a lot of that space as well. You see some mom-and-pop operations out there that are doing their own thing, but McCormick has proven time and time again that its scale in the space and the resources they have at their disposal, it's a very tough one to go up against.