Shares of McCormick & Company (MKC 0.23%) dropped 15.5% last month, according to S&P Global Market Intelligence. The global spice and flavoring business reported quarterly earnings that were roughly in line with Wall Street's forecasts. Still, investors were disappointed by the company's commentary on demand in China, outlook, and profit margin forecasts.
Investors were hoping for more from McCormick
McCormick delivered 6% annual sales growth last quarter, along with a 5% expansion in adjusted operating profit. Earnings per share (EPS) didn't reflect that growth, however, as it dropped from $0.69 to $0.65 after adjusting for special non-recurring items. Higher interest expenses drove EPS lower. Higher interest rates increased McCormick's borrowing costs despite the company's outstanding debt balance dropping.
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Asia-Pacific was the weakest region for McCormick in both its consumer and business-facing segments. The company cited economic weakness in China, where recovery from COVID-19 disruptions has been slower than previously hoped. According to commentary in the earnings report, this drag is expected to continue impacting results for the next few quarters.
McCormick reiterated its full-year guidance, which disappointed investors who hoped to see an upward revision thanks to gross margin improvement. Even if the outlook hasn't changed, the trends look positive for McCormick if you zoom out. Its sales growth rate rebounded from last year's weakness, and gross profit margin is moving upward with sales.
MKC Revenue (Quarterly YoY Growth) data by YCharts. YOY = year over year.
The consumer staples brand is seeing the benefits of focusing on more profitable products. The high interest rates driving interest expenses higher aren't likely to go away soon, but most analysts don't expect rates to get much higher from here. The company is on pace to produce more than $700 million in free cash flow, comfortably covering its dividends and debt repayment obligations.
Is McCormick stock cheap enough to buy on the dip?
McCormick produces popular basic goods, delivers impressive operational efficiency metrics, dominates its target market, and maintains a wide economic moat. These factors make this consumer staples stock a safe haven for investors during uncertain times. The company produces reliable cash flow to fuel dividends, and its low beta gives investors confidence that shares will perform relatively well in a market downturn.
Those attractive qualities are likely to fuel interest from value investors, with McCormack shares down more than 20% year to date. The stock is now available at a forward price-to-earnings (PE) ratio below 25 and carries a 2.4% dividend yield.
MKC PE Ratio (Forward) data by YCharts. PE Ratio = price-to-earnings ratio.
This valuation is much more reasonable than previous levels but is still more expensive than some high-quality value stocks. Its dividend yield is also much lower than the yields available on Treasury Notes, which are generally considered to have lower risk and less volatility than stocks. McCormick bulls have a much more appealing entry point at this price, but it still isn't cheap relative to fundamentals.
