By Erin Lash, CFA | 01-25-17 | 10:57 AM | Email Article

Wide-moat  McCormick ended the year on a solid note, posting 2.4% underlying fourth-quarter sales growth and 50 basis points of adjusted operating margin improvement to 18.4%. The top-line gain is notable because it came on top of a 5% bump last year and reflected broad-based growth across the consumer (up 2.4%) and industrial (up 2.1%) segments. We think this performance resulted from McCormick’s leading brands, solid retail relationships, and cost edge, which in combination support our wide moat rating. But McCormick isn’t resting on its laurels; it intends to drive further efficiency savings (with plans to shed more than $400 million in costs over the next few years) as a means by which to fuel brand spending, which should ensure the company maintains a leading competitive edge.

Erin Lash, CFA, is a director of consumer sector equity research for Morningstar.

For fiscal 2017, management anticipates mid- to high-single-digit organic sales growth and adjusted earnings per share of $4.05-$4.13, a touch below our $4.23 expectation partly due to a slightly higher tax rate assumption. Even after incorporating a more modest near-term earnings outlook, we don’t foresee a material change to our $91 fair value estimate, outside of a $1-$3 increase to account for additional cash generated since our last update. Our long-term outlook, which calls for 4% sales growth--with just more than half of 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), remains in place. However, with the shares trading at a premium to our valuation, we'd suggest investors await a more attractive entry point.

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Erin Lash, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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