Investors in early 2023 like McCormick (MKC 0.26%) stock for some good reasons. The company has a dominant position in an attractive consumer staples niche that supports solid sales growth and expanding profit margins. Its revenue has generally expanded at an industry-thumping rate while annual earnings gains approach double digits. Add in a growing dividend, and you've got a recipe for excellent overall returns.
But will that strategy sustain the business through the next economic cycle, which might feature lower consumer spending patterns for a time? Let's look at where McCormick is likely headed in 2023 and beyond.
Feeling the effects
McCormick is already starting to be pinched by an unfavorable shift in demand trends. Sales rose by just 3% in the most recent quarter that ran through late August, and management said in October that revenue was being hurt by "broad pressure on the cost of living from inflation.
This pressure impacts the business mainly by reducing sales volumes as consumers trade down to less expensive brands of spices, flavorings, and condiments. It has been amplified by McCormick's need to raise prices in response to higher costs on things like inputs, transportation, and labor.
There's a good chance that these unfavorable trends will continue into 2023, potentially pushing annual sales gains below management's long-term target of around 5% to 8%. That figure should land at about 4% for the full 2022 year, according to the official outlook.
Turning the tide
Yet investors are likely to see improving results on several fronts, starting as early as mid-2023. McCormick is already passing some of the worst of its supply chain challenges, which temporarily reduced profitability and sales in a few niches. The company was happy with the results from its 2022 price increases and is planning more hikes this year.
Watch organic sales volumes for signs that consumers are balking at the increases. On the other hand, if management strikes the right balance, then investors should see gross profit margin start marching back toward 40% of sales in 2023 and 2024.
MKC Gross Profit Margin data by YCharts.
Success here might also accelerate annual revenue growth back toward 8% in the coming quarters. But the unpredictable variable here is global economic growth trends, which may turn negative in 2023.
The flavorful outlook
In any case, McCormick has a good shot at generating solid shareholder returns over the next several years. Even if growth remains stilted in 2023, earnings trends should improve thanks to cost cuts, higher prices, and easing supply chain shortages.
The company's dominant market position gives it flexibility that its rivals don't have, too, and so does its more diverse portfolio that serves both consumers and restaurant chains with its food products.
As a result of these competitive assets, McCormick stock is likely to be a positive force for an investor's portfolio over the next several years. That's true even though most of 2022 showed weaker results in terms of sales and profit trends.
Assuming the company returns to its long-term growth trajectory, shareholders will be happy they held the stock into 2023 and beyond. Add in McCormick's dividend, which will rise for the 37th consecutive year beginning in January, and you have all the ingredients you need for a great stock investment.
