What happened
Shares of McCormick (MKC 2.08%) fell more than 10% on Thursday, weighed down by fears the U.S. economy would fall into a recession due to the COVID-19 coronavirus. The spice-and-flavors giant gets a growing portion of its revenue serving restaurants and institutional kitchens, and that business could come under pressure if the outbreak causes consumers to hunker down.
So what
McCormick is best known for its consumer spices, but the company in recent years has made a big push into providing flavors for restaurants. The company's non-consumer segment currently makes up about 39% of total sales and 31% of operating income, and that segment is growing faster than consumer sales.
Image source: Getty Images.
The company's shares gained nearly 75% over a two-year period ending in 2019, but McCormick was under pressure even before the novel coronavirus began to spread after issuing a bland outlook for 2020. Management called 2020 a transition year, with high hopes heading into 2021, but a prolonged slowdown in restaurant sales is sure to call that outlook into question.
Now what
Food is a consumer staple and should hold up well in a potential recession, but McCormick could find it hard to grow its premium flavorings business if the U.S. ends up in an extended slowdown. Given the nature of the business and the impressive run up the stock had enjoyed heading into 2020, it was probably inevitable that momentum would slow.
The novel coronavirus has accelerated that process. Until investors have more clarity about what the ramifications of the outbreak are for restaurants and other McCormick end markets, there's going to be some reluctance to buying the stock, even after the decline.
