Business is simmering nicely over at McCormick (NYSE: MKC). The company just reported third-quarter earnings up from a year ago and raised guidance. That must not have been enough, though, because the market shaved off 2.5% in pre-market trading. A SWOT review -- a look at the company's strengths, weaknesses, opportunities, and threats -- should tell us something about what's happening in the spice rack.
Strengths:
- Dominant market position.
- Twenty-six consecutive years of adding more flavor to the dividend. Plus, projected growth and a reasonable payout ratio point to the streak continuing.
- The company's Comprehensive Continuous Improvement program is expected to generate $50 million in savings for 2012.
- The business is diversified between consumer and industrial segments and diversified globally. Nearly 30% of revenue comes from outside the Americas.
Weaknesses:
- At nearly 21 times earnings, the stock is at a premium to the S&P 500's (INDEX: ^GSPC) 16.5, but in line with the consumer goods sector.
- Not much else.
Opportunities:
- Recent acquisitions are expanding the company's markets in Europe, Russia, India, and China. Plans are to generate 20% of revenue from emerging markets by 2015.
- Spice and flavor isn't a dead market: McCormick introduced 37 new products last year in Canada alone.
Threats:
- Rising commodities costs will threaten margins if the costs can't be passed on to consumers. The company's outlook expects high-single-digit increases in material cost.
- The global expansion plans mean exposure to currency risks and some soft economies.
Summary:
Nothing stands out as a reason for the stock's fall. McCormick offers investors a steady, slow-growth company, a reasonable dividend, and good prospects for dividend growth. It is priced at a premium to the broad market, but the stable business and dividend track record justify the premium.
Investors interested in a company in the same sector with more focus on North American markets might want to look at J.M. Smucker (NYSE: SJM). It trades at similar multiples, has a similar dividend, and has "an emphasis on North America while embracing a global perspective."
For a bigger company in the world of food, General Mills (NYSE: GIS) is a good starting place. It has a higher dividend than McCormick, trades at a little cheaper valuation, but has lower growth projections.
I own shares of McCormick and have CAPScalls on McCormick, Smucker, and General Mills. Any one of the three is a good candidate for someone looking for a core holding with a stable business model that's not too spicy.
- Add J.M. Smucker to My Watchlist.
- Add McCormick to My Watchlist.
- Add General Mills to My Watchlist.
