MCK Stock: is This S&P 500 Company a Buy, Sell, or Hold?
October 16 2023 - 8:54AM
Finscreener.org
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,
itU+02019s 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
McCormickU+02019s products significantly enhances mealsU+02019
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:
- FrenchU+02019s
mustard
- Seasoning blends from Old Bay,
Lawry’s, and McCormick
- FrankU+02019s RedHot and Cholula
hot sauces
- ZatarainU+02019s 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, whatU+02019s behind the
notable decline in McCormick’s stock? The answer lies in the
companyU+02019s 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 McCormickU+02019s 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. ItU+02019s 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.
McKesson (NYSE:MCK)
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