McCormick Cooks Up Bland Q2 Results as a Rash of Headwinds Take a Toll, but Shares Still Burning

McCormick’s tepid second-quarter results (flat organic sales growth and a 550-basis-point erosion in its adjusted gross margin to 34%, far worse than our 3.5% and 39.3% respective full-year marks) are evidence that the leading spices and seasoning manufacturer is fallible. A portion of the weakness is attributable to the usual suspects—inflation and supply chain disruptions—but this was exacerbated by lockdowns in China (though we view this as transitory) and the conflict in Ukraine. These challenges are reflected in its revised guidance as management trimmed its adjusted EPS forecast to $3.03-$3.08 from $3.17-$3.22. We intend to incorporate the firm’s year-to-date marks and near-term prognosis, but when juxtaposed with the benefit of time value, we see little to warrant materially altering our $63 fair value estimate. Even though shares pulled back marginally on the print, we view this wide-moat operator as rich, trading at more than a 30% premium to our intrinsic valuation and a forward P/E in the mid- to high-20s. We think the market has ascribed a lofty value to the name given its track record of consistent top-line growth but fails to consider the macro and competitive challenges that could forestall its trajectory.