Moskow sees McCormick as 'truly competitively advantaged'

by Eric Schroeder
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McCormick ethnic spices
McCormick is still in the early stages of capitalizing on structural demand in the spices and seasonings category.

NEW YORK — Credit Suisse on Oct. 25 upgraded McCormick & Co. to “outperform” from “neutral” while raising its fiscal 2017 estimates above consensus. The rating agency estimated 2017 earnings per share at $4.14, up from the previous estimate of $4.10 and compared with an estimate of $3.79 for fiscal 2016.

In the Oct. 25 report, Robert Moskow, research analyst with Credit Suisse, wrote that McCormick’s recent sell-off has given investors an opportunity to grab hold of what he called “one of the truly competitively advantaged names in the food space” while the company is still in the early stages of capitalizing on structural demand in the spices and seasonings category.

Robert Moskow, Credit Suisse
Robert Moskow, research analyst with Credit Suisse

“With only one other outperform rating on the stock, we see positive revisions to ratings and forecasts based on 1) category growth driven by millennials cooking more meals from scratch, 2) market share acceleration in the U.S. driven by product innovation and stronger relationships with retailers, and 3) re-acceleration of gross margin expansion,” Mr. Moskow said. “In addition, we believe new c.e.o. Lawrence Kurzius’ more aggressive approach to M.&A. increases the probability of a highly accretive deal in F.Y. ’17.”

Mr. Moskow said some investors expressed concern following McCormick’s third-quarter earnings call that hyperinflation on vanilla beans may compromise the company’s gross margin momentum and potentially cause margin dilution in 2017. In reality, he said McCormick has done a good job of passing through its vanilla costs to customers, and has not taken a large enough inventory position to pose a risk if prices start to decline.

“Our analysis of McCormick’s balance sheet supports our view that the company has been very conservative in regard to its vanilla position,” he said. “Unlike in 2003-04 when the company’s strategic purchase of vanilla caused its inventory levels to rise dramatically, we see no material increase in McCormick’s inventory levels in 2015 or 2016. As a result, we feel comfortable with management’s assertion that it will not fall out of synch with the market if vanilla costs were to start to decline.”

Lawrence Kurzius, McCormick
Credit Suisse says it believes new c.e.o. Lawrence Kurzius’ more aggressive approach to M.&A. increases the probability of a highly accretive deal in 2017.

In offering data to support its outlook, Credit Suisse pointed to strong category growth trends.

“Probably the best part of the McCormick story is the fact that it is the market leader of a vibrant category,” Mr. Moskow said. “While the vast majority of packaged foods companies have felt the pressure of shifting demographics and changing dietary preferences, the spice and seasonings category has experienced resurgence in popularity.”

He said the intimate connection that millennials have exhibited with the food they eat has helped drive the trend. Surveys have shown that millennials have embraced scratch cooking as a way to lead healthier lives and connect with friends and family. Additionally, millennials have shown a willingness to create higher quality meals that mimic what they find in restaurants.

Gourmet Garden herbs, McCormick
McCormick's acquisition of the Gourmet Garden brand satisfies millennials preference for fresher options.

“The recent acquisition of the $50 million-plus Gourmet Garden brand satisfies millennials preference for fresher options,” Mr. Moskow said.

Another factor coming into play is consumers’ belief that spices and herbs are good for you. The U.S. Dietary Guidelines Advisory Committee last year recommended to the federal government that the U.S.D.A. encourage the use of spices and herbs as a flavor alternative to sodium. In addition, the U.S.D.A. issued messages for school nutrition professionals and for people 65 and older to use herbs and spices to enhance taste while reducing sodium.

“With its strong R.&D. resources, McCormick has helped elevate the herbs and spices category among nutritionist thought leaders,” Mr. Moskow said. “University studies supported by the McCormick Science Institute have examined how red pepper can enhance energy metabolism and how flavor from spices and herbs can make healthier foods that are lower in fat and calories more acceptable to consumers.”

McCormick new products
McCormick has a steady pipeline of new innovations planned, including organic recipe mixes, Lawry’s Casero blends, new gourmet items, and Kitchen Basics bone broth.

In the second half of 2016 McCormick has a steady pipeline of new innovations planned for the United States, including organic recipe mixes, Lawry’s Casero blends, new gourmet items, Kitchen Basics stock and bone broth and recipe mix line extensions. Internationally, the company plans to introduce Central American cooking sauces, world cuisine, herb grinders, vahine dessert and Chinese recipe mix extensions.

Mr. Moskow said the conversion to organic and non-bioengineered ingredients also has had an impact on the company’s retail business. By the end of 2016, 80% of McCormick’s Gourmet line is expected to be converted to organic ingredients, and 70% of the base product line will be non-bioengineered.

“The McCormick Gourmet line is particularly important to the company because it indexes highly with millennial consumers,” he said. “The efforts to entice millennials are having a highly positive impact.”
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