Steady Growth, with a Pinch of Seasoning

08/09/2010 12:00 pm EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says spice purveyor McCormick should grow nicely in the next few years, and will likely boost its dividend, too.

McCormick (NYSE: MKC) sells spices and seasonings [to] customers [that] include grocery stores, food manufacturers, and restaurants. In fiscal 2009, 73% of net sales were generated in the Americas; 21% in Europe, Middle East and Africa (EMEA), and 6% in Asia/Pacific.

The consumer segment accounted for 58% of net sales and 75% of operating income in the first half of fiscal 2010. This segment makes spices, herbs, seasonings, dessert items, and other flavoring products.

Brands in the Americas include McCormick, Lawry’s, Club House, and Old Bay. The segment also markets private-label products. Wal-Mart Stores (NYSE: WMT) is the largest customer, responsible for 11% of fiscal 2009 net sales.

The industrial segment accounted for 42% of net sales and 25% of operating income. It makes seasonings, spices, herbs, wet flavors, and coatings [for] food manufacturers and food service customers, including Sysco (NYSE: SYY), Kraft Foods (NYSE: KFT), General Mills (NYSE: GIS), and McDonald’s (NYSE: MCD). PepsiCo (NYSE: PEP) is the largest industrial customer, responsible for 11% of fiscal 2009 net sales.

Sales have been relatively stable throughout the global economic downturn. Fiscal 2009 net sales climbed 0.5% year over year, to $3.19 billion, as higher prices and volumes offset unfavorable foreign exchange. The consumer business grew 3.3%, but the industrial business fell 3.4%. This is partly explained by consumers eating more meals at home.

Thanks to favorable foreign exchange and higher volumes, net sales [in the second fiscal quarter, ending May] grew 5.4% year over year to $798.3 million. The gross profit margin increased 101 basis points to 40.92%. The pro forma operating profit margin, which excludes restructuring charges in the prior year period, increased 40 basis points to 12.21%.

Pro forma net income jumped 19.5% to $66.2 million, or 49 cents per share [in the quarter, while analysts expect] pro forma net income [to rise] 10.2% year over year to $310.7 million, or $2.35 per share [in the 2010 fiscal year ending in November].

The noncyclical nature of the business should help keep demand levels relatively stable. However, management warned that recent exchange rate behavior would reduce sales for the second half of the fiscal year by about two percentage points.

Nonetheless, full-year earnings should hit the high end of guidance due to cost savings, which should exceed $40 million. For the long term, management expects 4% to 6% annual sales growth with the higher-margin consumer segment accounting for 64% of sales by 2015. Continued cost savings will boost profit margins and help the company reach its target of 9% to 11% earnings per share growth.

The board of directors authorized a $400-million share buyback plan in June. The company has paid a cash dividend for 86 consecutive years and has increased the payout for 24 consecutive years.

(The stock closed above $39 Friday, a little off its 52-week high—Editor.)

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