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 5 Undervalued Companies for the Defensive Investor. 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 specific look at how McCormick & Company Inc. (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 entire food industry, retail outlets, food manufacturers and foodservice businesses. The Company operates in two business segments: consumer and industrial. The Company’s sales, distribution and production facilities are located in North America and Europe. Additional facilities are based in China, Australia, Mexico, India, Singapore, Central America, Thailand and South Africa. The Company operates in two business segments: consumer and industrial. Its products are sold directly to customers and also through brokers, wholesalers and distributors. In May 2013, the Company has completed its purchase of China’s Wuhan Asia-Pacific Condiments Co.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$42.07|
|Value Based on 0% Growth||$24.66|
|Market Implied Growth Rate||7.62%|
|Net Current Asset Value (NCAV)||-$8.65|
Balance Sheet – 5/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
McCormick & Company does not qualify for either the Defensive Investor or the Enterprising Investor. The Defensive Investor has concerns about the low current ratio, and the high PEmg and PB ratios. The Enterprising Investor is concerned by the level of debt relative to the net current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. From a valuation side of things, the company appears overvalued after growing its EPSmg (normalized earnings) from $2.11 in 2010 to only an estimated $2.90 for 2014. This low level of demonstrated growth in earnings does not support the market’s implied estimate of 7.62% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on McCormick & Company (MKC)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in McCormick & Company (MKC) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.