Warren Buffett has famously told investors "you only find out who is swimming naked when the tide goes out." The COVID-19 pandemic took the tide out in a unique way. It accelerated some changes that were already under way, and created some new trends, too.
Restaurants, grocers, and their suppliers have been particularly affected by closures and changes in consumer habits. That turmoil has revealed how spice and flavorings maker McCormick (MKC -0.38%) was inherently well positioned, and how it will be for the next market crash and recession.
Image source: Getty Images.
A winning model
McCormick operates a consumer segment as well as a flavor solutions group geared toward restaurants and packaged food companies. In 2019, slightly over 60% of net sales came from the consumer segment. Having a diverse customer base allowed the company to more successfully navigate through the pandemic-influenced time period as consumer spending patterns were upended.
When the company's flavor solutions sales suffered with lower demand from restaurants and commercial foodservice customers, its consumer segment picked up the slack. In its third quarter ended Aug. 31, 2020, flavor solutions revenue decreased 3% compared to the year-ago period, but its consumer segment sales increased 15%.
McCormick's business model has proven it will be successful both when consumer discretionary spending concentrates on cooking at home, and when people go back to spending at restaurants, stadiums, and hotels.
Comfort food, comfort stock
The company hasn't rested on its laurels, either. It added to its lineup of brands with the acquisition of Reckitt Benckiser's food division in August 2017. That brought Frank's RedHot, French's and Cattlemen's brands under the McCormick umbrella.
The company employs its marketing muscle to grow its brands. After the acquisition, McCormick created a limited-edition French's Mustard Ice Cream, a Frank's RedHot Wingman "Saucy Support Line" for football game tailgates, and more recently reintroduced a limited-edition Old Bay Hot Sauce, utilizing another of its well-known brands.
Image source: Getty Images.
Worth an investment
Investors may be paying up for McCormick stock at today's levels, but it's worth it for several reasons. While the recently announced 2-for-1 stock split isn't meaningful for the business fundamentals, McCormick chairman, president, and CEO Lawrence Kurzius said the decision to split the stock is "reflecting our sustained positive performance and outlook for continued growth."
Another level of comfort is that the company pays a small dividend, currently yielding 1.4%. Shares currently trade for a price-to-earnings ratio above 30, which is not surprising given the success the company has had throughout the pandemic. But it also is a valuation level consistent with where it's been most of the past year and a half.
Shares seem to be at a reasonable price, considering the relative safety one gets with the business. We've seen how consumers respond when they have to tighten their spending. The cooking-at-home trend the pandemic highlighted will likely dominate during the next recession. And in a flourishing economy, both McCormick's at-home and commercial avenues will benefit.
Whether the next market crash comes after the election or from a recession due to a normal economic cycle, McCormick stock is one investors can feel good about having in a portfolio.
