Leading brands and solid retail relationships give this wide-moat company a competitive advantage, but investors should await a more attractive entry point.
Erin Lash, CFA
09:24 AM | Email Article
Despite an uncertain global macroeconomic environment, wide-moat McCormick
posted solid third-quarter results (which included 3.7% underlying sales growth and a 130-basis-point increase in adjusted operating margins to 15.8%) that highlight the strength of its intangible assets and cost advantage. The top-line gain is even more impressive given that it came on top of a 5% uptick in the year-ago quarter and was broad-based across the consumer (up 3.4%) and industrial (up 4.3%) segments. Center-of-the-store categories continue to be challenged as consumers shop the perimeter of the store, and as such, we applaud McCormick's strategic efforts to extract costs (with plans in place to shed more than $400 million in costs over the next four years) that stand to provide the fuel to reinvest behind its brands and support its retail relationships.
Erin Lash, CFA, is a director of consumer sector equity research for Morningstar.
Management ticked up its full-year adjusted earnings guidance to $3.75-$3.79 (versus $3.68-$3.75 previously), but the firm’s revised outlook aligns with our $3.77 per share forecast. As a result, we don’t intend to make any change our $90 per share fair value estimate beyond the benefit from additional cash generated since our last update, which is likely to add $1-$2 to our valuation. And we don’t anticipate making any changes to our long-term outlook, which calls for 4% sales growth--with just more than half of the firm's top-line growth each year resulting from higher volume and favorable mix and the remainder reflecting increased prices--and operating margins to approach 17.5% by the end of our 10-year explicit forecast (about 300 basis points above the average margin over the past five years). We continue to believe that McCormick's leading brands, solid retail relationships, and cost edge warrant a wide moat, but with shares trading at a premium to our valuation, we'd suggest investors await a more attractive entry point.
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