The first relates to the disappointing performance within China and the Americas on the industrial side. The hope with Yum! is that it will be able to recover from its company specific issues but I think there might be some macro factors at play here too. Yum! Brands’ same-store sales in China were getting weaker even before the media scare stories and bird flu worries hit.
It was a similar story with McDonald’s Corporation (NYSE:MCD).
The outlook for the quick service restaurant sector is important to McCormick, since much of its industrial demand goes to this industry. The signs are that it is not just a Yum! issue. McDonalds’s could be facing a tough year this year, and Yum! investors need to take note.
McDonald’s management was very clear on its last earnings call that it intends to retain and even grow market share. This as a sign that it will be willing to sacrifice margins and cash flow in order to secure long term positioning. McDonald’s and Yum! are likely to increase competitive efforts in North America in order to try and make up weakness elsewhere. McCormick & Company, Incorporated (NYSE:MKC) investors will be hoping that Yum! wins out.
The second concern is that even though the consumer division is doing well, its growth is still slowing. The company announced it was increasing incremental marketing on its consumer brands to $15 million but, it did not raise revenue expectations. The weakness on the industrial side is increasing the pressure on the consumer side.Is this marketing increase a sign that it is having to work harder to hit its numbers?
The bottom line
I don’t want to appear too negative here, because this company has plenty of good long-term drivers, and its acquisition strategy makes perfect sense. However, if you are going to add this stock to your portfolio, you will need to assess it on a risk/reward basis. This is a stock that trades at 22 times its November 2013 earnings, which looks pricey when compared to International Flavors & Fragrances Inc (NYSE:IFF)’s forward PE of nearly 18, and German rival Symrise at 20 estimated 2013 earnings.
McCormick & Company, Incorporated (NYSE:MKC) is hardly cheap, and its underlying growth is slowing while its end-market customers (on the industrial side) are facing some difficult market conditions. This stock is worth monitoring for a long-term buy, but an entry point might only come should it miss estimates this year.
The article Why This Stock’s Valuation Is Looking A Bit Too Spicy originally appeared on Fool.com and is written by Lee Samaha.
Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends McCormick and (NYSE:MKC) McDonald’s. The Motley Fool owns shares of McDonald’s. Lee is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.