McCormick & Company shares: high price, significantly undervalued

McCormick & Company New York Stock Exchange: MKC the shares may not be cheap, trading at 22X this year’s earnings and 20X next year’s earnings, but they are undervalued. The company is among the highest quality consumer staples on the market, trading below its historical standards and near the middle of the group’s range. As the company’s trend toward growth and margin improvement yields results, the recovery will likely continue and may gain momentum.

Among the catalysts of this market are analysts. Analysts have yet to issue revisions to their outlooks, but are doing so because the group has severely underestimated McCormick’s positioning and the impact of his efforts.

The consensus rating has fallen to Cut from Hold over the past year and the price target has been cut by 6% on concerns that growth could slow and earnings power evaporate. Now, with growth still in the forecast and margin widening, reviews are likely to be positive and could include significant upgrades and price target revisions. As it stands, the consensus is in line with the post-release price surge and could limit gains in the near term.

McCormick surpassed the consensus and pushed higher; Follow the stock prices

McCormick & Company reported a solid quarter with revenue growth despite closing and divesting some low-margin businesses last year. The company reported net revenue of $1.6 billion, a 3% increase from last year. It’s important to note that revenues are up over one-, two-, three- and four-year comparisons and 33% since the first quarter of 2020, while stock prices remain depressed.

Revenue also beat the Marketbeat.com consensus by 320 basis points, led by strength in both segments, compounded by forex tailwinds. Organically, volume and mix were flat; On a reported basis, a 3% price increase was offset by a 1% decline in volumes related to divestiture and repositioning. Segmentally, consumer sales grew 1% and were driven by a 4% increase in Flavor Solutions.

Margin and cash flow are other strengths of McCormick. The company expanded its gross, operating and cash flow margins through revenue leverage, cost controls and pricing actions. The net result is a 140 basis point improvement in gross margin which led to a 35% increase in cash flow. On the earnings side of things, GAAP and adjusted earnings beat consensus, with adjusted earnings rising 7%, outpacing revenue growth by 400 basis points. Adjusted earnings beat consensus by 860 basis points.

McCormick’s guidance is the solution spice analysts have been looking for

McCormick did not raise guidance but reaffirmed its previous outlook. This includes expectations of flat, neutral growth on the FX front and widening margins, compounded by favorable commentary. The bottom line is that guidance is likely conservative given the momentum seen in the first quarter and could be increased mid-year. If not, McCormick is poised to outperform the consensus despite the caution, and the market will move higher because of it.

McCormick’s cash flow is critical because it helps the company maintain a strong balance sheet while paying dividends. At the end of the first quarter, the balance sheet shows an improved cash position, increasing assets, decreasing liabilities, decreasing long-term debt and equity increasing 3%. The dividend is worth about 2.4% with shares near $76, and the distribution is growing semi-aggressively at a high single-digit pace.

Institutions bought McCormick stock dipping

Institutions bought McCormick stock from its peak in 2022 to its low in 2023, and their purchases spiked in the first quarter of this year. This has laid a solid foundation in the market, confirmed with post-release action, and now a complete reversal is in play. The post-release action sent the market up nearly 10%, trading above critical resistance and showing support at the 150-day EMA. Since the market is thawing due to good news and is near the middle of an established range, it will likely continue to move higher to retest the top of the range. This brings the market close to $82.50.

Before you consider McCormick & Company, Incorporated, you’ll want to hear this.

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