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 also tend to 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 does the opposite, often depressing a stock’s price much faster, and much further in a downward trend 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.
For the past couple of years, one of the interesting sectors that I have put a lot of focus on is Consumer Staples. 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 continue to moderate moving into 2022, while others expect it to have a degree of “stickiness” that will extend well past the health crisis. The past year and a half has been good for this company’s bottom line, but for the past year the stock has been following a pretty extended downward trend that now has industrywide indications that costs are increasing, attributable to labor and supply chain challenges that are beginning to ripple through multiple economic sectors. 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 $21.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased 4.58%, while revenues were 8.33% higher. In the last quarter, earnings were almost 16% higher, while sales were about -0.5% lower. The company operates with a healthy margin profile that improved in the last quarter. Over the last twelve months, Net Income was 12.34% of Revenues, and strengthened in the last quarter, to 13.71%.
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 $518 million and translates to a Free Cash Flow Yield of 2.48%. That is a decline from a high a year ago at around $816 million, which is a concern.
Debt to Equity: MKC has a debt/equity ratio of .91. This is a relatively conservative number, however it doesn’t reflect the reality MKC one of the most highly leveraged companies in the Food Products industry. Their balance sheet indicates that in the last quarter, cash and liquid assets were a little over $312.6 million, versus $3.9 billion in long-term debt. The company’s operating profile suggests that servicing their debt isn’t a problem, however their modest, declining 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 $66 per share, which means that even with the stock’s big drop over the past year, MKC remains clearly overvalued, with about -17% downside from its current price, and a useful discount price at around $52.50.
Technical Profile
Here’s a look at the stock’s latest technical chart.
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 downward trend from a peak a year ago at around $101 to its current price at around $78. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The downward trend is easy to see, and the stock has picked up renewed bearish momentum in the last month and a half, dropping from a peak in early September at around $88.50. Immediate resistance is around $83, with support uncertain, but possibly at around $78, as the stock has been attempting to stabilize over the past few days. A drop below $78 could see the stock drop to around $73, based on temporary pivots that occurred in early 2020 during the stock’s bear-market drop and subsequent recovery during the first stages of the pandemic. A push above $83 isn’t likely in the near term, but would mark a likely reversal point for the current downward trend, with next resistance between about $87, where the 38.2% retracement line sits, and $88.50.
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 – and it isn’t likely to do so any time soon. The current downward trend makes any kind of bullish trade – short or long term – a very aggressive, low-probability move. That means that if you’re interested in working with this stock, the best approach will be to focus on short-term trading strategies. If the stock continues to stabilize around $78, and bounces higher, you could consider buying the stock or working with call options, using $83 as a nice short-term profit target. The more likely signal would come from a drop below $78; in that case, consider shorting the stock or buying put options, using $73 as a useful profit target on a bearish trade.