McCormick & Company, Incorporated (MKC) Isn’t Just a Food Industry Play

McCormick & Company, Incorporated (NYSE:MKC)If there were a stock market in 400 B.C., Hippocrates might be plunking down a few Greek drachmas on spice king McCormick & Company, Incorporated (NYSE:MKC). The father of western medicine’s philosophy was, “Let your food be your medicine and your medicine be your food.” So, it seems likely he’d consider McCormick & Company, Incorporated (NYSE:MKC) not only a food industry play, but also a health and wellness one.

Spices as the next wellness frontier

There’s a renewed interest in Hippocrates’ not long ago derided philosophy, which has resulted in huge growth in organic foods and vitamin and mineral supplements. These trends have made a long-term winner out of Whole Foods Market, Inc. (NASDAQ:WFM), and a winner since its IPO out of General Nutrition Centers, up 153% in two years.



YCharts

I think spices are the next wellness frontier, as many have reputed (and documented, in some cases) medicinal value.

According to McCormick & Company, Incorporated (NYSE:MKC)’s 2012 Annual Report, “Increasingly, industrial customers are turning to McCormick … to improve the health profile of their products … As evidence of this, more than 30% of our 2012 new product briefs for industrial customers had some healthy attribute.”

The big opportunity is on the retail end because of its larger margins. Consumer awareness of the health benefits of some spices is increasing. It’s only a matter of time before more people start thinking of buying spices in the same way they do as buying vitamins and mineral supplements, and even considering them items in which to stock their medicine cabinets, not just their spice racks.

Let’s use a SWOT Analysis (Strengths, Weaknesses, Opportunities & Threats) to look at McCormick.

STRENGTHS

(1) Brand Name

The company was founded in 1889, so its brand name has been embedded in the American consciousness for generations. While there are more herb and spice options now, McCormick was “it” for many people for generations. Many people stick with familiar products, a plus for McCormick.
(2) No. 1 Position

The $9.5 billion market cap company is the global leader in the manufacture and distribution of spices, herbs, seasonings and other flavors.
In 2012, the consumer business (retail) accounted for 60% of sales and 79% of operating income, and the industrial business (food manufacturers and food service) accounted for 40% of sales and 21% of operating income. Operating margins are considerably larger on the consumer end (18.9% vs. 7.6% in 2012). In 2012, revenue increased 8.6% and earnings-per-share increased 9%.
About half the company’s consumer business is spices, herbs and seasonings. In its primary markets, it has 40% to 60% market shares for these products. McCormick & Company, Incorporated (NYSE:MKC) makes money on other companies’ market shares, too, as it provides contract manufacturing services. It produces roughly half of store-brand spices, which can be a significant category for some products.

Competition is fractured. In the U.S., ACH Foods’ Spice Islands brand is a notable middle-market competitor. ACH is a subsidiary of the $22 billion market cap Associated British Foods plc (NASDAQOTH:ASBFY).

WEAKNESSES

(1) Organic offerings

Given its size and No. 1 position, McCormick & Company, Incorporated (NYSE:MKC) has not had as many organic offerings as one might expect. However, a recent view of the company’s product line indicates the company has been beefing up its organic offerings.

OPPORTUNITIES

There are trends other than heath and wellness that should benefit McCormick. These include:

(1) Popularity of ethnic cuisines

The company’s annual report mentions the trend toward consumers exploring authentic ethnic cuisines, many of which contain more herbs and spices than so-called typical American fare.

(2) Greater international expansion

McCormick is focused on growing its international business, particularly in the emerging markets. In 2012, the emerging markets accounted for 14% of revenue, which is double that of five years ago. McCormick & Company, Incorporated (NYSE:MKC)’s goal is to reach 20% by 2015. In China, revenue grew 23% in 2012, based largely on increased consumer demand (rather than price hikes).

THREATS

(1) Growth of (conventional grocery) store-brand products

As previously stated, the company produces roughly half of store-brand spices. This is a double-edged sword. While McCormick’s margins are lower on these products than its own brands, a small chunk of the store-brand pie is better than none. However, the threat is the store-brand pie growing and taking market share away from McCormick’s brands.

Given the high brand loyalty among spice buyers – about 64% usually buy the same brand – the growth of store brands is not yet as much of a concern as it is with other products. But this is a threat investors need to keep an eye on.

(2) The squeezing of the middle-market

This dynamic has largely happened in the retailing business. Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) have done well with their focus on providing low prices for many categories of products. Upper-middle end specialty retailers, such as Lululemon Athletica and Michael Kors Holdings Ltd (NYSE:KORS) have carved out nice niches. Meanwhile, the J.C. Penney Company, Inc. (NYSE:JCP) of the world — where much of middle America used to shop — have largely been left behind with no discernible identity.

I don’t think the threat is as great to middle-market grocery brands and stores, but some squeezing has occurred. McCormick & Company, Incorporated (NYSE:MKC) doesn’t need to address the lower-end threat (dollar store spices), but it might be well served to address the middle-upper end threat from Whole Foods Market, Inc. (NASDAQ:WFM) and others. Specialty retailers such as Penzey’s, which sells fresh spices via a limited (but growing) number of retail stores and has an online site, can be considered a limited threat. However, Whole Foods, given it carries a private label line of packaged organic spices and herbs, presents a greater threat. (Whole Foods’ private label line is manufactured by Frontier Natural Products Co-op.)

Foolish bottom line

McCormick’s stock is pricey based on conventional measures (23 P/E, 20 forward P/E, 2.7 5-year PEG for a company with EPS growth of 9% in 2012), but that’s to be expected for a stock with these attractive features: No. 1 position in industry; strong brand name; high-quality (consistent) earnings; a Dividend Aristocrat (one of a small number of companies that have raised dividends each year for at least 25 years); and a low stock price volatility (beta of 0.45).

The increasing penetration of the emerging markets, particularly China, should keep growth chugging along.

A bonus would be a Berkshire Hathaway Inc. (NYSE:BRK.A) buyout. I know speculation on acquisition targets runs rampant, but there’s little doubt that McCormick is on the possibility list (my other top pick is J.M. Smucker Company).

The article McCormick Isn’t Just a Food Industry Play originally appeared on Fool.com and is written by BA McKenna.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!