Being a value-oriented investor means that seeing stocks trading at or near historical lows tends to make a stock more interesting than when it is trading near historical highs.
For growth investors, that sounds odd since growth investing puts an emphasis on upward trends and stocks trading at or near their yearly highs. Sometimes a long decline in a stock’s price can be attributed to significant problems in a company’s profitability and operations, which is why most growth-oriented investor automatically shun downward-trending stocks. However, if the market inflates a stock’s price faster than a company builds its profits, the inevitable fall from grace that almost always follows 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 investor looks for. The point where that long, downward trend reverses can provide a nice opportunity for value and growth investors to be aligned at the same time, if all of the conditions I’ve just described are still in place.
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 investor, no matter their method, also takes the time to keep track of sector-based analysis. 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 opportune times.
For most of the past three or four years, one of the most useful 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 stock has been riding bullish momentum since March, rising from a 52-week low at around $70 to a peak in late June at above $94. Since then, the stock has dropped a little over -10% on the heels of its latest earnings report. Are things really as bad as the stock’s price action seems to suggest, or is that just an overreaction that doesn’t give proper credit to the company’s underlying fundamental strength? Let’s find out.
Fundamental and Value Profile
McCormick & Company, Incorporated is engaged in manufacturing, marketing and distributing spices, seasoning mixes, condiments and other flavorful products to the entire food industry retailers, food manufacturers and foodservice businesses. The Company operates through two business segments: Consumer and Flavor Solutions. In the Consumer segment, it sells its products under the McCormick brand and a variety of brands around the world, including French’s, Frank’s RedHot, Lawry’s Cholula Hot Sauce and Club House, as well as brands, such as Gourmet Garden, OLD BAY, Zatarain’s, Stubb’s, Thai Kitchen, Simply Asia, Ducros, Schwartz, Kamis, DaQiao and La Drogheria. In the Flavor Solutions segment, the Company provides a range of products to multinational food manufacturers and food service customers. Its sales, distribution and production facilities are located in North America, Europe and China, and additional facilities are based in Australia, Central America, Thailand and South Africa. MKC has a market cap of $22.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 25%, while revenues increased by almost 8%. In the last quarter, earnings growth was more muted, at $1.69, while sales picked up by almost 6%. The company operates with a healthy margin profile that has narrowed in the last few months. Over the last twelve months, Net Income was 10.74% of Revenues, and slipped in the last quarter to 9.17%.
Dividends: MKC pays a dividend of $1.56, which translates to an annualized yield of 1.87% at the stock’s current price. MKC is among an elite group of companies that are considered “dividend aristocrats,” having maintained and increased their dividend every year for the past 39 years (they have paid a dividend every year since 1925), with the most recent increase coming just before the end of 2022.
Free Cash Flow: MKC’s free cash flow is $612.3 million and translates to a Free Cash Flow Yield of 2.69%. That is an increase from a year ago at around $450.6 million, and more than $457.2 million in the last quarter. The increase is an interesting counter to the negative Net Income pattern just described.
Debt to Equity: MKC has a debt/equity ratio of .83. This number signals a generally conservative management approach to leverage, however it is worth noting that it increased, from 0.74 in the quarter prior. Their balance sheet indicates that in the last quarter, cash and liquid assets were $127.4 million (down from $356.8 million in the quarter prior), versus $4.1 billion in long-term debt (an increase of nearly $500 million from the quarter prior). The company’s operating profile suggests that servicing their debt isn’t a problem, however their modest Free Cash Flow, along with declining liquidity (while debt is increasing) also imply the company has little margin 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 $92 per share, which means that MKC is somewhat undervalued, with about 8% upside from its current price, and a useful discount price at around $73.50. It also bears mentioning that in the first quarter of this year, this same analysis yielded a long-term, fair value target price at around $64 per share.
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 upward trend from its March low at around $70.50 to its high, reached in late June at around $94.50. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has dropped sharply off of that high after the latest earnings report, but appears to have found its latest pivot low this week, marking current support at around $83. Immediate resistance is a little above the stock’s current price, at around $85 where the 38.2% retracement line sits. A push above $85 should have room to rally to about $89 before finding next resistance, while a drop below $83 could see the stock drop to about $80, around the 61.8% retracement line before finding next resistance.
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 of a stock that is trading at a useful value price as of yet. It also has some fundamental issues, in the form of declining Net Income, deteriorating liquidity and increasing debt that I think make waiting for improvement in these numbers to be seen before taking any kind of value-based opportunity seriously. That means that short-term trading strategies provide the best opportunities to work with this stock right now. A push above $85 could offer an interesting signal to buy the stock at its current price, or to work with call options, using $89 as a good bullish profit target. A drop below $83, on the other hand could be a signal to consider shorting the stock or buying put options, with 80 acting as a useful profit target on a bearish trade.