McCormick & Company Stock Isn’t Cheap, But It Is Undervalued

Key Points

• McCormick & Company had a solid quarter and reaffirmed guidance: the market thinks guidance is cautious. 
• Cash flow is robust and allows for reinvestment and dividends while paying down debt. 
• Analysts have the stock pegged at Reduce but may quickly change their tune now that results and guidance are in. 

McCormick & Company NYSE: MKC stock may not be cheap, trading at 22X this year’s and 20X next year’s earnings, but it is undervalued. The company is among the highest-quality consumer staples on the market, trading below its historical norms and near the middle of the group’s range. Because the company’s leaning toward growth and margin improvement produces results, the rebound will likely continue and may gain momentum. 

Among the catalysts for this market are the analysts. The analysts have yet to issue revisions to their outlook, but they are coming because the group grossly underestimated McCormick’s positioning and the impact of its efforts. 

The consensus rating fell to Reduce from Hold over the last year, and the price target was cut by 6% because of fears growth would slow and earnings power evaporate. Now, with growth still in the forecast and margin widening, it is likely that revisions will be positive and may include significant upgrades and price target revisions. As it is, the consensus aligns with the post-release price surge and may cap gains in the near term. 

McCormick Outpaced Consensus and Guided Higher; Share Prices Followed 

McCormick & Company had a solid quarter with top-line growth despite shuttering and divesting some low-margin businesses last year. The company reported $1.6 billion in net revenue, a gain of 3% over last year. The revenue is important to note because it is up in the one-, two-, three-, and four-year comparisons and up 33% since Q1 2020, while share prices remain depressed. 

Revenue also outpaced the Marketbeat.com consensus by 320 basis points, driven by strength in both segments compounded by an FX tailwind. Organically, volume and mix were flat; on a reported basis, a 3% price increase was offset by a 1% decline in volume related to divestiture and repositioning. Segmetnally, Consumer sales grew by 1% and were led by a 4% gain in Flavor Solutions. 

Margin and cash flow are other strengths of McCormick. The company widened its gross, operating, and cash flow margins driven by revenue leverage, cost control, and pricing actions. The net result is a 140-basis-point improvement in the gross margin that led to a 35% increase in cash flow. Regarding earnings, GAAP and adjusted earnings outpaced the consensus, with adjusted earnings up by 7%, outpacing the revenue growth by 400 bps. The adjusted earnings outpaced the consensus by 860 bps. 

McCormick’s Guidance Is The Spice Analysts Were Looking For

McCormick did not raise its guidance but reaffirmed the previous outlook. That includes an expectation for flat FX-neutral growth and widening margins, compounded by favorable commentary. The takeaway is that guidance is likely cautious given the momentum seen in Q1 and may be increased mid-year. If not, McCormick is set up to outperform consensus regardless of caution, and the market is moving higher because of it. 

McCormick’s cash flow is crucial because it helps the company maintain a fortress balance sheet while paying dividends. At the end of Q1, the balance sheet highlights an improved cash position, assets up, liabilities down, long-term debt down, and equity up 3%. The dividend is worth about 2.4% with shares near $76, and the distribution is growing semi-aggressively at a high-single-digit pace. 

Institutions Bought The Dip In McCormick Stock

Institutions were buying McCormick stock all the way down from its peak in 2022 to the bottom in 2023, and their purchasing spiked in Q1 this year. That put a solid floor in the market, confirmed with the post-release action, and now a full reversal is in play. Post-release action has the market up nearly 10%, trading above critical resistance and showing support at the 150-day EMA. Because the market is melting up on good news and is near the middle of an established range, it will likely continue moving higher to retest the range’s top. That puts the market near $82.50.