McCormick's (MKC 1.68%) business is on the rebound. The spice and flavorings giant said in late March that sales growth accelerated as compared to the prior quarter. Profitability trends improved, too, despite added stress on the business from inflation and rising costs.
The company still faces challenges that might pressure shareholders' returns for 2023 and beyond. With that big picture in mind, let's look at whether McCormick stock is a buy right now.
The latest results
The Q1 earnings update contained plenty of good news for shareholders. Organic sales growth trends improved to a 5% increase from a 2% uptick in the prior quarter. Sure, that result was well below the growth that PepsiCo is seeing today. The beverage and snack food giant is growing at a double-digit pace right now, mainly thanks to rising prices.
Yet McCormick executives were happy with the strong start to a new fiscal year, especially since volume fell only slightly even as price increases rolled through the portfolio. "We delivered strong first quarter results which reflect strong demand," CEO Lawrence Kurzius said in a press release.
Cash and profits
The news was even more positive around McCormick's finances. The combination of cost cuts and price increases allowed gross profit margin declines to slow considerably. Rather than falling by 4 percentage points, as it had in Q4, gross margin fell by less than 1% this quarter. Executives are projecting steadily improving results here, too, thanks to the lapping of a few cost spikes a year ago and the divestment of McCormick's kitchen basics business.
McCormick has also solved many of the supply chain issues that pressured earnings in 2022. "We are addressing the pressure points from last year," Kurzius told investors in a press release. Success here helped operating cash flow improve significantly year over year.
Outlook and valuation
McCormick is still projecting that sales will grow by between 5% and 7% this year as operating income rises by about 9% to 10%. Those forecasts line up with management's long-term goals for boosting sales at a slightly higher pace than the broader consumer packaged foods market while simultaneously increasing profitability. Toss in the dividend payment, and total shareholder returns can sit comfortably above 10% in that scenario.
The stock's valuation has declined in recent months but still sits above many peers. Investors have to pay about 3.5 times annual sales for the business, compared to 2.9 times for PepsiCo. That premium makes sense if you believe that the company can maintain the long-term growth outlook described above.
The fact that this year's growth is coming entirely from price increases challenges that bullish narrative. There's a limit to the sales gains that can come from those moves, after all, since consumers can always trade down to less expensive flavorings, spices, and sauces.
McCormick isn't risking major demand pullbacks yet, though. And the relatively modest volume decline in early 2023 implies significant pricing power. As a result, investors might consider the stock a tempting bargain right now. The company appears to be through the worst of its cost and demand pressures, with likely improving earnings results on the way in late 2023 and beyond.
