Shares of spice and flavor business McCormick & Company (NYSE:MKC) declined 10.5% in February according to data provided by S&P Global Market Intelligence. That was a touch more than the S&P 500 Index, which was off by around 8% for the month. The big driver of the decline was fear surrounding the spread of COVID-19. That said, McCormick is generally considered a defensive stock because it makes food products. So why was its price decline deeper than the broader market's drop, especially when the company's financial results have been generally strong?
McCormick reported earnings in late January and the news was pretty good. Sales were up 1% (a strong showing in the food space these days), it generated record cash flow, and the first dividend of 2020 will be 9% higher than the last dividend payment. Moreover, management painted an even brighter picture of the future, providing guidance for a 2% to 4% sales increase in 2020.
But, when investors started to get increasingly worried about the coronavirus in China and its spread to the rest of the world, McCormick's good news was quickly overshadowed. In reality, it makes a good deal of sense that the stock would be down more than the market. While its business is highly diversified with a collection of great brands, roughly 69% of its sales come from the Americas. Europe, Africa, and the Middle East make up 19% of the top line with Asia chipping in the remaining 12%. Roughly 23% of sales come from countries the company considers emerging markets.
Basically, McCormick's global footprint has put it in the line of fire when it comes to COVID-19, which has moved well beyond China's borders. Worse, nearly a quarter of its sales come from countries that are likely to be the least capable of handling an outbreak if one should hit. Investors responded by pulling back a little harder. That's not an illogical call, especially since McCormick's stock has handily outdistanced the broader market over the last decade.
Even after this decline, McCormick's stock appears to be priced at a premium relative to its recent past. And investors would be wise to take its 2% to 4% sales growth guidance with a grain of salt. Now is probably not the best time for investors to add this stock to their portfolios.