McCormick Is No Longer Too Spicy

NEW YORK (TheStreet) -- With year-to-date gains of only 8%, McCormick (MKC) 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.

Despite a slight increase in the company's brand marketing expenses, management still increased the company's consolidated operating income by 3% to $148 million. This means the company's Comprehensive Continuous Improvement (CCI) program, designed to cut costs and improve efficiency, is working.

I've spoken quite bit about the importance of organic growth, which measures a company's operational performance using only internal resources and excluding events like acquisitions.

In that regard, I won't deny that much of McCormick's 4% revenue increase was driven by the Wuhan Asia-Pacific Condiments Co. deal, which McCormick announced in May. But this deal falls in line with the three key growth initiatives that management said it would emphasize, including growing the company's geographical presence.

Besides, given the importance placed on product diversification, this deal allows management to kill two birds with one stone -- and I haven't even mentioned the investments McCormick is making in areas like India, where the company is targeting long-term revenue growth of 20% in the next two years. This is on top of the 60% revenue growth McCormick expects to gain in China from the WAPC deal.

All told, I believe McCormick's management, which has consistently raised its dividend, is once again on the right track to return value to shareholders. There was a point when I believed this stock was too spicy for my taste. But with year-to-date gains of only 8%, trailing the S&P 500's gains by 17%, McCormick offers plenty of flavor for investors who want exposure to a packaged food industry that's starting to look quite tasty.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense. His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio. His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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