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

I confess to becoming increasingly perplexed with the markets these days. While whole swathes of the technology sector look like good value it is increasingly hard to find stocks in more defensive sectors like food and health care with which to balance a portfolio. Such thoughts came to mind when looking at McCormick & Company, Incorporated (NYSE:MKC)’s latest set of results. They were disappointing, and the stock sold off only to see the value investors buying back in. Is it time to follow them in?

McCormick’s Disappointing Quarter

I previously discussed McCormick in an article linked here and made reference to some of the questions over its underlying trends. Most notably, McCormick’s underlying consumer segment revenue (which makes up nearly 79% of income) growth was only around 4% for the previous two quarters (excluding acquisitions), and industrial growth slowed to 2.8% in the last quarter. Furthermore, analysts had 4.8% revenue growth penciled in for 2013, a number I found hard to have a lot of confidence in thanks to the Q3 results.

Roll on to Q4, and company guidance is for 3-5% sales growth in 2013 with a disappointing set of earnings reported. The problem in the quarter was that US consumer performance (a high margin business) was weaker than anticipated, and a number of reasons were cited. Sandy affected some supplies, but the key issues seem to be the following:

• Retailers lowered inventory from last year.
• McCormick had to issue coupons and price promotions because customers were still adjusting to pricing.
• Industrial demand in China was weak thanks to lower levels of promotions at restaurants like Yum! Brands, Inc. (NYSE:YUM).

The weakness in China was somewhat presaged by slowing same store sales growth at the fast food outlets in China, in particular at YUM, and it’s not just about the recent chicken debacle. In fact, as discussed in this article, things were slowing down over the course of the year. McDonald’s Corporation (NYSE:MCD) too has seen slowing growth. While this is disappointing, it is the weakness in the US consumer segment that has really had an effect.

To demonstrate this, here are revenues ($millions) and operating income margins:

With regards to the Americas region, consumer pricing rose 2.6% but was offset by a 2.2% decline in volume/product mix, and there was also some negative impact from US industrial as its clients didn’t launch as many new products as usual in the quarter.

By way of comparison EMEA constant currency revenues were up 10% with particular strength on the industrial side.