Is Facebook a fad? Can Research In Motion turn around? Are we all really going to compute in the cloud?
Let’s set aside these puzzles about the future of business and instead handle a question we’ve been asking for several centuries: Is there money to be made in the spice trade?
For McCormick & Co. Inc., the answer is “yes.” The Maryland-based company commands roughly half the North American spice market through the McCormick, Lawry’s and Old Bay brands. At the same time, it’s boosting its top line with savvy acquisitions and expanding margins through cost-cutting. Its dividend – a current yield of 2 per cent – is in its 88th consecutive year.
For all this, investors must pay up. McCormick is no value pick: The shares are trading at their 52-week high, and the forward price-to-earnings ratio is pushing 20. Yet investors interested in companies with dominant positions, healthy cash flow and the potential for more growth may find McCormick a tasty addition to their portfolios.
The company traces its roots to a one-man Baltimore operation in 1889 that marketed brands like Iron Glue (Slogan: “Sticks Everything But the Buyer”) and Uncle Sam’s Nerve and Bone Liniment (“For Man Or Beast”). The company grew its namesake brand and built itself through a series of acquisitions, the biggest in 2008, when it took out major competitor Lawry’s. (McCormick’s Canadian business grew out of the 1959 acquisition of London, Ont.-based Gorman Eckert & Co. Ltd., which McCormick would quickly rename Club House Foods.)
It may be easy to think of the jars of spice in the supermarket aisle, muse that no one really cooks at home any more, and that there can’t really be much more opportunity for the company.
McCormick’s range of sales is broader, however. Its consumer business includes both its branded goods and a robust private-label business that helps capture sales at times that consumers shift down-market due to economic pressures. It also has a business serving the food industry directly that Morningstar Equity Research analyst Erin Lash says is similarly dominant, making it “a one-stop shop for packaged food companies and restaurant chains looking for new flavours or textures to add to their products.”
Not that the company has sat on its hands as people cook less; its “Recipe Inspirations” line, with small amounts of premeasured spices attached to a recipe card, targets those who want to make the occasional meal but can’t figure out how to use an entire bottle of oregano. Christopher Growe of Stifel, Nicolaus & Co. Inc. says the company expects new product sales to reach 10 per cent to 12 per cent of its total sales annually by 2015 with 75 per cent of those sales coming from these types of “value-added products.”
Meanwhile, McCormick has plenty of room to run internationally. Akshay Jagdale of KeyBanc Capital Markets notes that while around 90 to 95 per cent of herbs, spices and seasonings in the United States are sold as packaged food items, that’s true for only about half the global seasonings market. This “implies that the size of the category is actually [about] $18-billion (U.S.) and that McCormick’s consumer business actually only has a 9 per cent share.”
Five years ago, the company’s share of sales in emerging markets was in the single digits; by 2015, management hopes, it will be 20 per cent. The company employs joint ventures and acquisitions to make its international entries, rather than starting from scratch. That’s made possible by a healthy balance sheet, with just under $1.3-billion in debt versus annual EBITDA, or earnings before interest, taxes, depreciation and amortization, of about $650-million.
One of the few negatives about McCormick is the price. Ms. Lash of Morningstar believes fair value for the shares is $53, well below recent prices in the low $60s; Mr. Growe has a “hold” because he says the company’s “lofty” premium, while “justified,” limits significant upside in the near term. Mr. Jagdale has a “buy” but just a $65 price target.
But in a recent article for U.S. personal finance newsletter Bottom Line Personal, Andrew Knuth and Edmund Nicklin of Connecticut’s Westport Advisors LLC named McCormick one of their five favourite investments for the next 10 years.
The company “may seem a little stodgy, but we like having this cash-generating machine in our portfolio,” they said. McCormick, then, may be a stock that investors with a longer horizon can salt away.
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