Food Processing Stocks

McCormick & Company Valuation – January 2017 $MKC

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – December 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how McCormick & Company (MKC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): McCormick & Company, Incorporated manufactures, markets and distributes spices, seasoning mixes, condiments and other flavorful products to the food industry, including retailers, food manufacturers and foodservice businesses. The Company operates in two segments: consumer and industrial. Its brands in the Americas include McCormick, Lawry’s, Stubb’s, Club House, Zatarain’s, Thai Kitchen and Simply Asia. In Europe and the Middle East and Africa (EMEA), the Company’s brands include the Ducros, Schwartz, Kamis, Drogheria & Alimentari, and a line of Vahine brand dessert items. In the Asia/Pacific region, it markets products under the McCormick and DaQiao brands in China. In Australia, it markets its spices and seasonings under the McCormick brand and its dessert products under the Aeroplane brand. In India, its joint venture trades under the Kohinoor brand. The industrial segment sells to food manufacturers and the foodservice industry both directly and indirectly through distributors.

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of MKC – January 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $11,763,745,082 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.09 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 71.21% Pass
6. Moderate PEmg Ratio PEmg < 20 28.04 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 6.79 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.09 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 8.34 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $3.33
MG Growth Estimate 3.22%
MG Value $49.74
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth $48.26
MG Value based on 0% Growth $28.29
Market Implied Growth Rate 9.77%
Current Price $93.33
% of Intrinsic Value 187.62%

McCormick & Company, Incorporated does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $2.74 in 2012 to an estimated $3.33 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 9.77% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into McCormick & Company, Incorporated revealed the company was trading above its Graham Number of $34.16. The company pays a dividend of $1.69 per share, for a yield of 1.8% Its PEmg (price over earnings per share – ModernGraham) was 28.04, which was above the industry average of 24.74. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-11.66.

McCormick & Company, Incorporated scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$11.66
Graham Number $34.16
PEmg 28.04
Current Ratio 1.09
PB Ratio 6.79
Current Dividend $1.69
Dividend Yield 1.81%
Number of Consecutive Years of Dividend Growth 20

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Most Recent Balance Sheet Figures

Balance Sheet Information 8/1/2016
Total Current Assets $1,468,000,000
Total Current Liabilities $1,341,200,000
Long-Term Debt $1,057,900,000
Total Assets $4,716,500,000
Intangible Assets $2,246,900,000
Total Liabilities $2,959,100,000
Shares Outstanding (Diluted Average) 127,900,000

Earnings Per Share History

Next Fiscal Year Estimate $3.72
Nov2015 $3.11
Nov2014 $3.34
Nov2013 $2.91
Nov2012 $3.04
Nov2011 $2.79
Nov2010 $2.75
Nov2009 $2.27
Nov2008 $1.94
Nov2007 $1.73
Nov2006 $1.50
Nov2005 $1.56
Nov2004 $1.52
Nov2003 $1.48
Nov2002 $1.26
Nov2001 $1.05
Nov2000 $0.99
Nov1999 $0.72
Nov1998 $0.71
Nov1997 $0.65
Nov1996 $0.26

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.33
Nov2015 $3.10
Nov2014 $3.05
Nov2013 $2.86
Nov2012 $2.74
Nov2011 $2.49
Nov2010 $2.24
Nov2009 $1.92
Nov2008 $1.72
Nov2007 $1.59
Nov2006 $1.50
Nov2005 $1.46
Nov2004 $1.36
Nov2003 $1.22
Nov2002 $1.04
Nov2001 $0.89
Nov2000 $0.77

Recommended Reading:

Other ModernGraham posts about the company

McCormick & Company Inc. Analysis – August 2015 Update $MKC
20 Companies in the Spotlight This Week – 8/16/14
McCormick & Company Inc. Annual Valuation – 2014 $MKC

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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