NYSE:MKC McCORMICK & COMPANY
Sector financial performance:
This company, which manufactures spices, seasoning mixes, condiments and other flavorful products, was grouped into flavors food sector of flavor &fragrance industry.
Relatively strong demands have stayed behind global increases in both sales volumes and selling price/product mix of flavor food products in the past four years. Our companies’ data indicates that for both flavor foods for consumers and for industry the demands increased faster from emerging market such as Eastern Europe and Asian market than US market, especially the demands from industry in emerging market.
We think the fact that the fastest growth came from food companies of emerging market is consistent with our analysis on flavor& fragrance ingredient industry in another report. We think the deep reasons behind sales’ growth in developing market and slowing down sales volume growth in developed market are actually the ones that we have been seeing across the whole food industry, which are increased disposal incomes, resulted from global economy growth and increasingly accumulated wealth, and increased health and wellness awareness. They help bring a larger range of choices for consumers of developing market in terms of food and beverage’s quantities and qualities, which in fact explains why the existing products of developed market have been seen increasing consumption volumes in developing market. At the same time, increased disposal incomes, working with increased health and wellness awareness, also is driving consumers in developed market to pursue healthier lifestyle including foods with more natural and organic ingredients. Limited by demographic structure and high consumption level of consumers in developed market, the new lifestyle of consumers are not bring increased consumption volumes for developed market. However, it can help improve margins and profits for those companies who are more competitive in products innovation since the consumer would like to pay more for their new healthier life.
In fact, the margins of companies (a typical gross margin at 44% and operating margin at 17%) in this sector have been largely improved (if exclude impacts of currency) even though the costs of materials increased in this flavor sector in the past several years. It is partially because the companies have been able to pass those increased costs on the selling price. But the more important reason is that, as we analyzed above, the sales is shifting to more value-added products (healthy/organic with higher margin).
According our analysis, a typical ratio of enterprise price/adjusted EBI is 36 with interest/EBI of 25%.
It seems that the demands for this company’s flavor products both from consumers and manufacturers customers have been strong in the past four years. This can be seen from the increase in its sales volume, which has an average of 1-2% annually, and the rising average selling prices as well.
For the first nine months of fiscal 2018 compared with same period of 2017(20180831)
Organic sales increased by 3.3% excluding acquisition and currency impacts attributable mainly to rising price (2%) and increase in volume/mix (1%).
For fiscal 2017 compared with 2016(20171130)
Organic sales increased by 3.8% excluding acquisition and currency impacts attributable mainly to rising price (2%) and increase in volume/mix (1.7%).
Organic sales increased by 2.8% excluding acquisition and currency impacts for the 6 months ending at May 31, 2017 attributable mainly to rising price.
Organic sales increased by 3.2% for 2016 including 1.7% from increase in volume and 1.5% from rising price.
Organic sales increased by 5% for 2015 including 4% from increase in volume and 1% from pricing.
Due to naturally strong demands, this company has been able to manage to raise price to offset the increasing materials costs, which increased for four years straight. While adverse negative impacts from currency, this company still successfully improved its gross margin by about 1% in 2016 by pricing action and its gross margins went down by 0.3% and 0.1% in 2015 and in 2017 respectively. Therefore, its gross margins have been kept at around 41% before 2017. However, due to improved saving and product mix’s shifting to high price categories, its gross margin increased largely to about 44% in 2018. Due to small changes in its spending in SG&A (26%) as percentage of sales, its operating margins reached to about 17% during the same period of time.
This stock currently has an enterprise price /EBI ratio of about 36, presenting its healthy business interns of market and brand and management in controlling costs and debts. Our valuation methods and analysis concluded that the market may currently be fairly valued.
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