Analyst Note| Erin Lash, CFA |
In our view, wide-moat McCormick’s third-quarter results (8.6% organic sales growth, 70 basis point of gross margin expansion to 41.3%, and 60 basis points of contraction at the adjusted operating margin line to 19.1%) continue to evidence its competitive prowess. Growth was again weighed toward its consumer arm (60% of sales), which boasted 15% organic sales gains in the quarter, as consumers continue to favor at-home food consumption (80% of its consolidated sales historically) due to concerns surrounding COVID-19. And although its flavor solutions business remained tepid (down 2%), this was a marked improvement over the double-digit shortfall last quarter. While restaurant traffic continues to languish, demand from its packaged food customers has begun to bounce back (qualitatively referenced). However, the market was not enthralled, with shares down at a low- to mid-single-digit clip on the print, though this pullback still renders shares quite heated relative to our $109 fair value estimate (which we expect to edge up by a low-single-digit percentage, partly due to the benefit from the time value of money).