It’s about time McCormick (NYSE:MKC) shares start participating in the broader stock market rally. The spices, flavorings, and condiments seller recently announced another quarter of strong sales growth that bolsters management’s claim that many cook-at-home trends will stick around after the pandemic threat fades.
McCormick should benefit disproportionately from those consumer shifts, but that’s not the only reason to like this stock following its second-quarter earnings report.
1. Growth is here to stay
Many consumer packaged foods companies are predicting higher demand for their products following the pandemic. But McCormick’s results through late May show that it can capitalize on that lift better than its peers.
Sales were up 8% this quarter as higher consumer sales more than offset a weak restaurant business. Sure, that’s slower than the 20% spike the company reported last quarter. But it still translates into market share growth and a higher sales base compared to before the pandemic struck. McCormick’s Q2 revenue is up 20% compared to 2019, in fact. General Mills (NYSE:GIS), for context, just reported less than half that expansion rate.
2. Pricing power
McCormick has more room to raise prices thanks to its portfolio of brands that tilts toward high-margin products like hot sauces and other condiments. That’s important because costs are increasing quickly right now.
That move hurt profit margins slightly this past quarter, with gross profit margin falling slightly. But its current 40% rate stacks up well against General Mills’ 36%. McCormick just implemented price increases that should lift sales and earnings through the rest of the fiscal year, and that’s a big reason why management just lifted their 2021 outlook for both metrics. Sales should rise by between 8% and 10%, they predict, even as major markets like the U.S. settle back down to more normal consumer mobility patterns. In comparison, PepsiCo (NASDAQ:PEP) is targeting about a 5% growth uptick this year.
3. Cash flow
McCormick is also expecting a double-digit earnings boost this year along with strong cash flow. Annual operating cash recently crossed the $1 billion mark, in fact, and should continue to rise thanks to the company’s growing portfolio and falling costs.
That success is giving CEO Lawrence Kurzius and his team room to spend aggressively on brand marketing and innovation, meaning growth might easily stay near the 9% to 10% level after the pandemic threat passes.
Shareholder returns will be amplified by higher cash coming through stock buybacks and dividends. I’d expect these direct returns to grow faster over time, too, as McCormick makes progress paying down the debt it took on to make game-changing condiment and sauce acquisitions in recent years.
Combine that bright outlook with the fact that this stock is down over the past year and is trailing peers like PepsiCo and General Mills, and you have a compelling investing thesis. Sure, it’s no steal at its current valuation of about four times annual sales. But McCormick stock should still deliver strong returns to investors who hold on as it capitalizes on cook-at-home trends over the coming decades.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.