Morningstar

McCormick Purchase Worth the Price?

Reckitt Benckiser's fast-growing, highly profitable food-brand mix may offset the deal's rich price tag.

Securities In This Article
McCormick & Co Inc Registered Shs Non Vtg
(MKC)

Wide-moat

However, McCormick paid a full price--7.2 times estimated fiscal 2017 sales and 19.5 times EBITDA--which we think points to the likelihood that a bidding war emerged for these attractive assets; a slew of packaged food firms were rumored to be interested after RB placed these brands on the block this spring. While this is above the 14-19 times EBITDA we anticipated RB’s food fare would fetch, we recognize that the assets' high 20s operating margins far exceed the mid- to high teens levels that characterize the packaged food landscape (and McCormick), which we think supports an above-average valuation.

We intend to review our discounted cash flow assumptions but don’t foresee a material change to our $96 fair value estimate, with the benefit from the addition of this fast-growing, highly profitable mix offsetting the rich price tag. With the shares trending lower, we believe long-term investors may have an opportunity to build a presence in a high-quality packaged food operator with relatively attractive growth prospects at a discount.

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About the Author

Erin Lash, CFA

Sector Director
More from Author

Erin Lash, CFA, is a sector director, AM Consumer, for Morningstar*. In addition to leading the sector team, she covers packaged food and household and personal care companies. Beyond managing a team of nine analysts and associates covering an array of consumer firms, Lash also conducts fundamental analysis of 13 multi-billion-dollar market capitalization firms in the packaged food and household and personal care space.

Before joining Morningstar in 2006, Lash spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance. In this capacity, Lash analyzed financial statements, business strategy, and fundamentals of owned companies and potential investments, presenting her recommendations based on this analysis to State Farm portfolio managers for ownership consideration.

Lash holds a bachelor’s degree in finance from Bradley University’s Foster College of Business. She also holds a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. Lash has completed the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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