Pages

Custom Search

Search Mad Money Fund Blog

Are You Buying Jim Cramer's Get Rich Carefully Book ?

Share Stock Picks

Saturday, March 8, 2008

Spice Up Your Profile


McCormick & Co.

Stock Price: $34.64
52-Wk High: $39.73
52-Wk Low: $32.66
Market Cap: $4.4 billion
Est. FY'08 EPS*: $2.11 per share
FY'08 P/E: 16.4x
Est. Long-Term EPS Growth**: 9%
Est. (FY'08/FY'07) EPS Growth: 10%
Revenue (FY'07): $2.92 billion
Dividend Yield: 2.5%
CEO: Alan D. Wilson
Headquarters: Sparks, Md.




McCormick Shares Can Regain Lost Flavor
By JOHANNA BENNETT

THOUGH SOME INVESTORS LOST their appetite for McCormick & Co., the spice king's growing profits could lure investors back to the table.

The stock has fallen 12% since it almost hit a record high in February of 2007 amid fears that rising commodity costs will dim profitability this year.

But thanks to new products, cost cutting, acquisitions and growing demand for its products as fewer Americans dine out, McCormick -- which makes the sauce McDonald's puts on its Big Macs -- has the earnings growth that Wall Street craves.

"It's not a high flyer," says Alan Lancz, president of Alan B. Lancz & Associates, a money-management firm. "They generate stable earnings growth. There is potential for acquisitions. And it's near a record low multiple."

Profits should climb during the current fiscal year ending Nov. 30, 2008, at a faster clip than those generated by the packaged-food industry. And after falling last year, cash flow from operations should climb as well.

McCormick plans to continue its 21-year history of annual dividend hikes.

And despite a premium to the broader market, the shares could climb 25% over the next year.

"It's a good entry point," says Matt Arnold, an analyst with Edward Jones. "All this stock has to do is revisit its historic average P/E [19.5 times projected forward earnings of $2.11 a share] and the upside is significant."

Founded in 1889 in Baltimore, McCormick initially sold flavor extracts, root beer and bone liniment door to door before growing into the nation's largest maker of spices and seasonings.

The company controls 14% of the $13 billion U.S. market for seasonings and dressings, says IBISworld, an industry research firm.

Products sold in supermarkets such as seasoning packets and food mixes generated 58% of McCormick's annual revenues.

Bottled spices generated half of those sales.

Meanwhile, 42% of McCormick's business resides with restaurants and food manufacturers, such as PepsiCo's Frito-Lay division, which makes Doritos using a cheese coating from McCormick.

"They operate like a big food company," says George Van Horn, an IBISworld analyst. "They are multifaceted, enhancing their dominant position with diverse product lines that appeal to rapidly growing market segments."

Like bigger rivals, McCormick has expanded into foreign markets. It has cashed in on the demand for organic products and gourmet spices, while also developing cheaper-priced private-label products.


* McCormick's 2008 fiscal year ends Nov. 30, 2008.
**Based on analyst estimates looking ahead three to five years.
Sources: Yahoo! Finance, Thomson First Call, Thomson Financial/Baseline.The company has redesigned store shelves and launched spice bottles with built-in grinders.

And coming this year: flavored peppers, and "crusting blends" mixing high-quality bread crumbs and seasoning.

The innovation is paying off. Last fiscal year, 10% of revenues were generated by products launched during the previous 18 months, according to Lancz.

Yet like the rest of the industry, McCormick faces rising costs, namely packaging and big jumps in the price of pepper, dairy, soy oil and wheat.

One-time restructuring and tax changes hurt cash flow from operations, which fell about 25% to $250 million last year.

Still, McCormick's profits still grew 12% in the 2007 fiscal year to $1.92 a share.

This year, the company's profits and cash dividend payment should both increase by 8% to 10%.

Plans are under way to better manage receivables and ingredient inventories at manufacturing plants, helping to fuel the company's plans to boost operating cash flow back above $300 million.

"The goals that we have set are achievable," Chief Executive Alan Wilson told Barron's Online. "The biggest headwinds we face are commodity costs, but there are opportunities for improvement."

A restructuring plan launched in 2006 should wrap up this year. McCormick is repurchasing stock.

But prospects in 2008 rely on McCormick raising prices, acquiring new consumer brands and improving the profitability of its industrial business.

McCormick raised prices this year 2% to 3% across its entire business.

In November, the company announced the $605 million purchase of Lawry's, a well-known maker of marinades, from rival Unilever.

The deal should close this year. And some investment pros speculate that McCormick may be eyeing some Kraft product lines.

Wilson declined to comment on specific acquisition targets. But McCormick is interested in opportunities in emerging markets and with well-known brands, he says.

McCormick has jettisoned 30% of its industrial clients since 2005 to focus instead on its 50 biggest clients, the largest of which is PepsiCo.

Culling smaller customers caused a 2% drop in revenues. But Mitchell Pinheiro, an analyst with Janney Montgomery Scott expects McCormick's industrial business to double its operating profit margins -- now 6% -- in three years.

"We feel good about where we are positioned as a company," says McCormick's Wilson. "There are challenges ahead from commodity prices. The consumer is under stress. But we are very well positioned."

McCormick's stock looks cheap to some investment pros.

At 16.4 times forward earnings, McCormick trades near a five-year low and at a slight discount to the basket of packaged-food stocks tracked by Thomson Financial.

Lancz recommends buying the stock at $35 a share or lower.

Of course, problems occur even in the best kitchens.

Delays launching new products or completing acquisitions will hurt future profits. Dilutive acquisitions will anger investors, as will another drop in cash flow.

IBISworld expects commodity prices to keep climbing.

Yet profits and dividends are growing. Overseas sales are rising, and joint ventures in Mexico and other counties continue contributing to McCormick's bottom line.

And these days, that's a recipe for tasty returns.
Post a Comment