This is why the company perfectly illustrates the dilemma investors are facing in this stock market. Is the company’s modest, but consistent growth in revenues and earnings worth the big run-up?
McCormick is the famous spice and seasoning manufacturer that’s been around since 1889. It’s a very solid business, but meaningful earnings growth for the company is elusive.
On the stock market, the company’s shares appreciated about 20 points over the last 12 months. The position just bounced off its all-time stock market high and has been running strong since its breakout at the end of 2011.
In the company’s first-quarter earnings report for fiscal year 2013, total sales grew three percent to $934 million. Earnings inched slightly higher to $76.0 million from $74.5 million. Management reaffirmed this year’s sales growth of between three and five percent with the expectation that demand from quick-service restaurants in the U.S. and China will improve.
The company’s 20-year stock chart is featured below:
Chart courtesy of www.StockCharts.com
For such a mature business, McCormick has been a very solid stock market holding. The company’s earnings growth is modest, however, and its stock market strength is due to an expansion of valuation for consistency and stability.
Institutional investors have been buying the safest, most consistent names, including many blue chips; however, there can’t be a bull market unless stock market participation expands into more groups.
McCormick is a low-beta stock that has proven that it’s worth accumulating when it’s down.
The stock is pricey, compared to its peers in the processed and packaged goods subsector, especially given its modest earnings expectations.
But McCormick should remain an institutional favorite, because people are still going to use spices, regardless of the state of the economy. (See “Agriculture the Key to Real Portfolio Growth?”)
There is growing concern about the outperformance of consumer staples and healthcare stocks. The Procter & Gamble Company (NYSE/PG) is up more than 10 points on the stock market since January.
This “safe haven” breakout is still positive, but earnings have to deliver. All kinds of brand-name blue chips have run up tremendously—almost unbelievably.
But it will all be just a trade if earnings results don’t show growth. So far, numbers are coming in a little bit light. But business conditions in the first quarter were expected to be slow, just like gross domestic product (GDP) in the fourth quarter of 2012.
Investor sentiment still isn’t strong enough to carry this market higher on just consumer staples and healthcare stocks. Broadening is the key for the near-term rally to continue.