Is McCormick & Company, Incorporated (MKC) a Good Value?

A look at sales growth by segment:

What Makes McCormick Tick

McCormick is a highly rated stock, and for good reason. It’s been a key beneficiary of some favorable trends in the economy. The recovery hasn’t been kind to the mass consumer, and many food companies like H.J. Heinz Company (NYSE:HNZ) or Campbell Soup Company (NYSE:CPB). have found it tough going to get consumers to take pricing. There seems to be an ongoing cycle of food companies raising prices only to be met with volume declines. The main way out of this cycle is to innovate with flavoring, and this has obvious benefits for McCormick.

Moreover, more stay at home eating means increased demand for McCormick’s flavorings and fast food restaurants, which usually do okay in tough times. I also think that increasing multi-ethnicity in Western economies is encouraging consumers to adopt new flavoring as they try new food and ethnic populations increase. Putting all these things together suggests that McCormick is well placed to benefit from an ongoing weak economy.

The question is, will these conditions continue to be the same in 2013?

Where Next for McCormick?

I suspect the flavorings trend will continue, but if the economy improves (and it is slowly) then any shift in marginal behavior by consumers could have an effect. The good news is that margins are set to increase following commodity cost moderation, and McCormick must be hoping that it can ease up on couponing and promotions within the Americas in 2013 so the full benefits of margin improvements can kick in.

Frankly, I think that whenever companies engage in this sort of promotional activity, investors have a duty to question whether it is a temporary issue or the start of some end market weakness. I think it’s too soon to tell.

If it is temporary then the margin improvements will drop into the bottom line, but even if this occurs McCormick is only guiding towards 4-6% EPS growth this year. On a forward PE ratio of over 20x this stock is certainly not cheap for the uncertainty. I’ll take a pass.

The article Is This Food Stock a Good Value? originally appeared on Fool.com and is written by Lee Samaha.

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