McCormick's Recipe Is a Success

While other packaged food operators continue to be plagued by lackluster sales,

However, McCormick isn’t immune to headwinds, including accelerating cost inflation (which the firm anticipates ticking up at a mid-single-digit clip this year, driven by pronounced double- and triple-digit increases in both garlic and vanilla), combined with intense competition from other branded operators, small niche peers that have proved more agile in responding to evolving consumer trends, and lower-priced private-label fare. But to weather these challenges, McCormick is funneling even more resources behind its brands (with ad and promotional spend up 15% in the quarter), which we view positively as a means to support its leading edge (despite the potential hit to profits).

In light of its year-to-date results and the recent addition of the RB food brands--Frank’s RedHot sauce, French’s mustard, and Cattlemen’s barbecue sauce--management offered revised guidance for fiscal 2017 calling for 9%-10% reported sales growth and adjusted earnings per share of $4.20-$4.24. While we intend to review the assumptions underlying our $96 fair value estimate, we don’t foresee a material change to our valuation or long-term outlook (which incorporates 4% sales growth and high-teens operating margins). Shares trade at a modest premium to our valuation, and we’d suggest investors refrain from building a position at current levels.

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