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TheStreet Open House

McCormick Is No Longer Too Spicy

Stocks in this article: MKC HRL CPB KRFT MDLZ NSRGY

NEW YORK ( TheStreet) -- With year-to-date gains of only 8%, McCormick (MKC - Get Report) stock has been a relative underperformer to rivals such as Hormel (HRL) or Campbell Soup Company (CPB), which have posted gains of 48% and 17%, respectively. But in terms of operational improvements, McCormick has been anything but bland.

While the sector's overall performance has been hard to digest, McCormick continues to deliver where it matters most. Not only has management improved McCormick's margins, but the company has posted strong returns on capital. They also compare favorably to other food giants such as Kraft (KRFT) and Mondelez (MDLZ).

McCormick stock was up 20% on the year to a 52-week high of $75.26 in May.  Unfortunately, the shares suffered when the Street then dumped its shopping cart of food companies. At that time the industry was getting burned due to weak growth prospects and poor volumes. Since then, investors have starved for operational improvement.

McCormick bounced back with 8% growth since August, plus better than expected third-quarter earnings results. I see $12 of potential upside on improved international growth prospects, especially in China. The bears will argue the stock is still not cheap enough relative to Nestle (NSRGY). But I believe opportunistic investors should take a bite here. McCormick has all of the ingredients for a sizzling 2014.

McCormick's management has outlined three key growth initiatives: growing the company's base business, becoming more innovative in product development, and expanding the company's brand portfolio and geographical presence through acquisitions.

With revenue growing 4% in the recent quarter, which is more than double the growth output on a sequential basis, I believe management is heading in the right direction. The Street, meanwhile, sees things differently.

Unimpressed by the company's organic growth, some investors raised questions about the effectiveness of management's targeted growth areas such as frozen meals and dry dinners. Some doubted how well McCormick would fare in the face of competitive pressures from Kraft and Nestle, which ramped up their marketing and promotions. The fear is that McCormick will be forced to match these rivals dollar for dollar to gain or even maintain market share.

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