Being a value-oriented investor means that seeing stocks trading at or near all-time highs is actually a demotivating factor; that’s because value-based analysis compares the value of the company’s book of business against the stock’s current price. Since the market tend to inflate stock values, upward trends typically outpace the growth in profitability. That means that from a value perspective, it gets harder to find stocks at attractive valuation levels at higher prices.
That same mindset also means that seeing stocks trading at or near historical lows tends to pique a value investor’s interest. Sometimes a long decline in a stock’s price can be attributed to significant problems in a company’s profitability and operations; but if the market inflates a stock’s price faster than a company builds its profits, it also often depresses a stock’s price much faster, and much further than a company’s book of business suggests. That creates the kind of bargain opportunity that a deliberate, analytical value investors looks for.
Broad market conditions can contribute to the perception of value or growth as well. As the economy cycles from expansion and growth to contraction and even recession, different sectors and industries experience their own, separate cycles from prosperity to scarcity. That’s why a smart value-focused investor also likes to keep track of sector-based analysis, since industries and sectors that may be following strongly bearish patterns can provide clues about where to find some of the strongest companies in those sectors at bargain prices.
Over the past year, one of the interesting sectors that I have put a lot of focus on is the Consumer Staples sector. This is where you’ll find the companies that make a lot of the products you’ll find all over your house – in your pantry, refrigerator and freezer, as well as the household goods in your bathrooms, kitchens and bedrooms. The products made by these companies are needed in just about all economic conditions, which is why they are considered “staples” – you’ll always have a need for those products in your home.
McCormick & Company Inc. (MKC) is a company in this sector that makes a lot of the products that you might not realize make up such a big part of what we use to feed our families. Spices, condiments, and seasonings are this company’s core. The pandemic has driven consumer trends to food-at-home for the past year, and that is a trend that some analysts expect to moderate as the economy reopens while others expect it to have a higher degree of “stickiness” that will extend well past the health crisis. The past year has been good for this company’s bottom line, but for the past year the stock has been following a pretty extended downward trend while the market has been focusing more and more on sectors and industries that sound sexier and more buzz-worthy. Does that mean the MKC fits the classic value-based description of a stock you should pay attention to? Let’s find out.
Fundamental and Value Profile
McCormick & Company, Inc is engaged in manufactures, markets and distributes spices, seasoning mixes, condiments and other flavorful products to the food industry-retailers, food manufacturers and foodservice businesses. The Company also partners with various companies that are involved in the manufacture and sale of flavorful products. The Company operates in two business segments: Consumer and Flavor Solutions. The Company’s sales, distribution and production facilities are located in North America, Europe and China. Additional facilities are based in Australia, India, Central America, Thailand and South Africa. MKC has a market cap of $24.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased 33.33%, while revenues were 22.25% higher. In the last quarter, earnings were -8.86% lower, while sales were almost -5% lower. The company operates with a healthy margin profile that narrowed in the last quarter. Over the last twelve months, Net Income was 13% of Revenues, and decreased in the last quarter, to about 11%.
Dividends: MKC pays a dividend of $1.36, which translates to an annualized yield of 1.49% at the stock’s current price.
Free Cash Flow: MKC’s free cash flow is $729 million and translates to a Free Cash Flow Yield of 2.99%. That is a modest decline from a high a year ago at around $781.4 billion, which is a concern.
Debt to Equity: MKC has a debt/equity ratio of 1.14. This is a relatively high number that makes MKC one of the most highly leverage companies in the Food Products industry. Their balance sheet indicates that in the last quarter, cash and liquid assets were a little over $256 million, versus $4.7 billion in long-term debt. The company’s operating profile suggests that servicing their debt isn’t a problem, however their modest Free Cash Flow and limited liquidity also imply the company doesn’t have a lot of room for error.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $76 per share, which means that MKC is clearly overvalued, with about -17% downside from its current price, and a useful discount price at around $61.
Technical Profile
Here’s a look at the stock’s latest technical chart.https://www.traderspro.com/#/stockAnalysis/MKC
Current Price Action/Trends and Pivots: This chart traces the stock’s movement over the last year. The diagonal red line traces the stock’s upward trend from May to September of last year, at a peak around $105. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. From that peak, the stock dropped into an extended downward trend that found a bottom at around $83 in March. The stock has rallied from that low, and this week bounced off of support at the 61.8% retracement line to push above the 50% retracement line and set current support at around $90.50. Immediate resistance is around the 38.2% retracement line, and in the $94 range. A push above $94 should have additional upside to about $100, while a drop below $90.50 should find next support at $87.
Near-term Keys: While I am a fan of a lot of the stocks in the Food Products industry, MKC unfortunately doesn’t fit the description as a stock that is trading at any kind of useful value price. That means that if you’re interested in working with this stock, the best approach will be to focus on short-term trading strategies. The stocks’ current push above $90.50 is a break above resistance that could be a useful signal to buy the stock at its current price, or to work with call options, using $94 as a good initial profit target, or $100 if bullish momentum builds. A drop back below $90.50, on the other hand could be a good signal to consider shorting the stock or buying put options, using next support at around $87 as a practical bearish profit target, or even the recent low at around $83 if bearish momentum accelerates.