Rising food prices in the U.S. weren't doing our comestibles industry any favors in September. They made finished food products more expensive to produce, and compelled consumers to be more cautious about their grocery shopping.
None of this was particularly good for spices, condiments, and flavorings specialist McCormick (MKC -0.31%), as evidenced by the stock's 16% decline over the course of that month. Did the company deserve the drubbing it took, however? I have my doubts.
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Losing its flavor
On the last day of August, a team of analysts from Bank of America (BAC +0.17%) published an update on consumer staples stocks. In their view, those rising costs will continue to put the squeeze on such companies for the rest of the year. Compounding that, these businesses have limited scope for raising prices further, given the already notable inflation in foodstuffs.
The bank's prognosticators flagged two key factors in this. The first is the steep rise in fuel costs, particularly diesel, which powers many of the trucks that ship food products around this country. The second is the Russia-Ukraine war, which is driving up prices of food industry inputs.
The analysts identified eight companies that they feel will continue to come under pressure from these factors. The ray of sunshine, in their view, is that as a specialized business, McCormick will not be as badly affected as a broader food company like Conagra (CAG +1.97%) or Pilgrim's Pride (PPC -0.36%).
Still, some professionals tracking the company were losing their optimism. On Sept. 14, TD Cowen's Robert Moskow went as far as to downgrade his recommendation on McCormick. For him, the stock is now a hold with a price target of $55 per share; previously, he had pegged it as a buy at a fair value assessment of $60. Several days later, his peer at JPMorgan Chase (JPM +0.17%) unit J.P. Morgan, Thomas Palmer, shaved $1 off his price target to $62 per share. However, he maintained his overweight (i.e., buy) recommendation on the shares.
NYSE: MKC
Key Data Points
October surprise?
McCormick had a September to forget, but the stock didn't stay in the dumps for long. On the back of a better-than-expected third quarter, the results of which were published Oct. 1, it's staged something of a recovery. The fact that it's still down from its level at the start of September, though, shows that investors remain wary of its future.
I don't think they need to be so cautious. Long ago, McCormick established a solid foothold in its flavorings/condiments niche. As an ace operator in this limited field, it knows how to keep margins relatively high for the food industry, and throw off enough cash to pay a high-yield dividend that's been raised for 40 years in a row. Its fundamental growth hasn't been hot, admittedly, and that probably won't change, but at 4.2%, that yield sure is spicy. Also, due to the specialized nature of its business, McCormick typically trades at a forward P/E over 20; it's now at a beaten-down level of 14, which I believe is unsustainable long-term.
Yes, it will feel the squeeze from food prices, especially if they continue to rise past New Year's, but I'd be optimistic that this trend will cool in the coming months.
