MCK: Is This S&P 500 Company a Buy, Sell, or Hold?

Investing in low-beta stocks might not be the most thrilling journey for investors, given their characteristically low volatility. They may not promise rapid growth but offer a significant level of stability, often becoming the cornerstone of an investment portfolio.

Consider the case of McCormick & Company (NYSE: MCK), a spice manufacturer exemplifying the nature of low-beta stocks. Typically, it's a steadfast performer and a consistent dividend provider. However, it has recently experienced an uncharacteristic downturn, plummeting over 30% from its peak in the past year. 

Is this a sign of a foundational crack in McCormick’s steady performance, or is it an unexpected opportunity for potential investors to buy at a lower price? Let’s see.

Is MCK stock undervalued in 2023?

McCormick enjoys a leadership position in the spice sector, surprising investors with its 33% drop from its peak in the last 12 months. Despite the pullback, the renowned S&P 500 dividend stock continues to add zest to the global culinary landscape.

MCK operates under two primary segments. Its consumer business accounts for 59% of sales, while flavor solutions contribute 41%. A small addition of McCormick's products significantly enhances meals' flavor without substantially adding to the cost.

The consumer segment is more than just the well-known McCormick brand of spices and seasonings. It also boasts leading brands like: 

  • French's mustard
  • Seasoning blends from Old Bay, Lawry’s, and McCormick
  • Frank's RedHot and Cholula hot sauces
  • Zatarain's Cajun seasoning blends
  • Club House, Kamis, and Ducros spices and seasonings

Approximately two-thirds of the company’s consumer sales stem from these spices, seasonings, condiments, and sauces, giving McCormick control over 40% of the U.S. market dedicated to enhancing food flavor.

In the flavor solutions segment, McCormick extends its expertise, offering culinary research to food manufacturers, with Pepsi (NASDAQ: PEP) being a notable client. The company plays a pivotal role in flavoring various products, including snacks, beverages, baked goods, savory items, and health and wellness products like vitamins and gummies.

Inflation impacts McCormick’s sales and profits 

So, what's behind the notable decline in McCormick’s stock? The answer lies in the company's recent third-quarter results. Although sales saw a commendable 6% increase, the net profit margin took a hit, dropping from 14% in 2022 to 10% this year. This decline also affected the earnings per share (EPS), which fell by 23%, leading to a corresponding dip in the stock value.

 The rampant inflation affecting economies globally is the primary culprit behind this downward trend. The company’s gross profit margin has suffered as inflation rates soared in 2022. However, for prospective investors, this dip could represent a ripe opportunity, as McCormick's foundational strength and market dominance remain intact.

For instance, a scenario where McCormick elevates its net profit margin from the prevailing 9.8% to its 2020 pinnacle of 13% positions it at 19x earnings. This presents a substantial value proposition compared to the S&P 500’s average price-to-earnings (P/E) ratio of 23x. It's a particularly compelling prospect considering McCormick’s track record of stability and security in investment, barring the past quarter.

The enhanced appeal is not just for those eyeing capital appreciation but also for investors inclined toward passive income streams. The decline in stock price has inadvertently amplified the dividend yield to 2.5%, a peak not witnessed since 2010. With the dividend distribution accounting for a mere 64% of its net income, the prospect of McCormick continuing its illustrious 36-year run of consistent dividend raises appears promising.

What next for MCK stock? 

The company’s entrenched leadership in the spice industry, anticipated to witness a 6% annual growth through 2030, further accentuates its appeal. As McCormick navigates the path to profitability restoration, the stock is envisaged to revert to its historical stability. In this trajectory of financial recovery, shareholders are poised to reap both appreciation in stock value and consistent dividends. 

In essence, the current scenario paints a promising picture for potential investors. The combination of a discounted stock price, an elevated dividend yield, and the company’s unyielding dominance in a growth-oriented spice industry underlines a conducive environment for investment. 

Shareholders can reasonably anticipate a blend of capital appreciation and a reliable income stream as McCormick embarks on its journey of financial and operational resurgence.

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