Tasty Sales and Margins, But McCormick Overpriced

Despite an uncertain global macroeconomic environment, wide-moat

Management ticked up its full-year adjusted earnings guidance to $3.75-$3.79 (versus $3.68-$3.75 previously), but the firm’s revised outlook aligns with our $3.77 per share forecast. As a result, we don’t intend to make any change our $90 per share fair value estimate beyond the benefit from additional cash generated since our last update, which is likely to add $1-$2 to our valuation. And we don’t anticipate making any changes to our long-term outlook, which calls for 4% sales growth--with just more than half of the firm's top-line growth each year resulting from higher volume and favorable mix and the remainder reflecting increased prices--and operating margins to approach 17.5% by the end of our 10-year explicit forecast (about 300 basis points above the average margin over the past five years). We continue to believe that McCormick's leading brands, solid retail relationships, and cost edge warrant a wide moat, but with shares trading at a premium to our valuation, we'd suggest investors await a more attractive entry point.

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