McCormick
Willoughby McCormick found his company in 1889 by going door to door with flavors and extracts. Today, McCormick & Co. Inc (MKC, Financial) is in the same business but has a market cap of $24.74 billion and sells its products in 150 countries.
In its 10-Q for the quarter ended Aug. 31, it explained, "We manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food industry – retailers, food manufacturers and the foodservice business."
Despite its age, McCormick still emphasizes growth, both organically and through acquisitions. Driving the former are the development of new products, improved brand marketing and expanded distribution.
Recent acquisitions include Reckitt Benckiser's (LSE:RB.) Food Division in 2017, which brought in three brands: French's, Frank's RedHot and Cattlemen's. And, just days ago, it announced it had purchased Cholula Hot Sauce from L Catterton.
Over the past five years, it has grown its revenue per share by 4.8% per year and has done even better with its Ebitda and earnings per share:
- Five-year Ebitda per share growth rate: 11.90% per year.
- Five-year earnings per share without non-recurring items growth rate: 14.40% per year.
What's the source of the Ebitda and earnings per share edge? In 2017, McCormick launched what it called its Global Enablement initiative, designed to enable a platform for future growth while reducing costs, speeding up decision making, increasing agility and adding capacity.
Investors appear to like what they have been seeing, steadily pushing up the share price, as shown in this 10-year chart. At least they were until August of this year:
Note how fast the share price has grown. It also has a dividend yield of 1.32% and combining that with the share price growth rate of 14.53% produces a total return of 15.85%. However, some of that growth will be offset by dilution; over the past three years, it has grown its share count by an average of 1.6% per year.
Regarding dividends, McCormick began paying them in 1925 and has increased its dividend every year for the past 35 years.
Its financial strength is rated at only 4 out of 10, largely because it assumed a significant amount of debt in 2017. That has left it with a cash-to-debt ratio of 0.05 and an interest coverage ratio of 7.28. However, there is still a positive difference between its return on invested capital and its weighted average cost of capital:
That helps generate a profitability ranking of 8 out of 10; it also helps to have an operating margin of 18.66% and a net margin of 13.75%, as well as a return on equity of 21.05%.
As we saw above, the share price has been mostly in reverse for the past three months, making it more affordable. Still, a couple of metrics suggest it hasn't come down enough yet for value investors:
- GuruFocus Value chart: Modestly undervalued.
- Price-earnings ratio: 32.98, which is above the 10-year median of 19.41 for the Consumer Packaged Goods industry and above its own 10-year median of 23.44.
- The PEG ratio, calculated by dividing the price-earnings ratio by its five-year Ebitda average, is 2.89, well above the fair value mark of 1.
Summing up, McCormick is a solid performer with strong margins and ROE; the biggest negative is a debt load that will likely scare away many value investors. As for its valuation, if you think the company's share price will turn and head upward again, this may be a good time to buy. If you see future price increases as uncertain, this will be a wait-and-watch stock.
Tootsie Roll
Tootsie Roll Industries Inc. (TR, Financial) goes back to 1896, when Leo Hirschfield created a rolled candy, named it after his daughter and began selling them for a penny each. Today, it is a $1.97 billion company by market cap and sold $524 million worth of candies in 2019. Its biggest sales season is Halloween.
It gets at least one vote for undervaluation since its share price has been slipping since early April, and even more so since May 20, 2019 when it was at $39.04:
Other metrics vary:
- Price-earnings ratio: 18.7, which is below the industry median of 19.23 and its own 10-year median of 31.
- PEG ratio: Not available because its five-year Ebitda per share growth rate was negative at -2.50%.
- Discounted cash flow (DCF): Unreliable, because Tootsie Roll has a predictability rating of just 1 out of 5.
Negative Ebitda over the past five years should raise a red flag, as should its negative earnings per share growth. We get a hint about the source of the problem from a paragraph in the 2019 annual report. Chairman and CEO Ellen R. Gordon wrote:
"Net earnings grew to $64.9 million in 2019 from $56.9 million in 2018. The increase in earnings was attributable to higher price realization which has allowed the Company to recover some of the margin decline that has resulted from higher costs of certain inputs in recent years. Plant efficiencies driven by capital investments and ongoing cost containment programs contributed to improved earnings."
That problem solved, Tootsie Roll was then hit by the pandemic this year. In its third-quarter earnings report, the company advised that some of its sales channels have been closed and that a pandemic Halloween both led to lower sales. With sales down, production was down and manufacturing became less efficient, again having a negative effect on Ebitda and earnings per share.
Still, management sees reasons to be optimistic. In the earnings report, the company noted:
"The Company is well positioned to return to higher sales and profits when the adverse effects of the Covid-19 pandemic subside. We are focused on the longer term and therefore are continuing to make investments in plant manufacturing operations to meet new consumer and customer demands, achieve product quality improvements, increase operational efficiencies and provide genuine value to consumers."
That belief is backed up by a relatively strong rating for financial strength, which is 7 out of 10. Tootsie Roll has little debt and lots of cash. In fact, the cash-to-debt ratio is a healthy 17.54. It also enjoys a good ROIC versus WACC ratio. Return on invested capital is 6.54%, while its weighted average cost of capital is 0.57%.
Similarly, while its operating margin has slipped, it is still in the double digits at 12.91% and its net margin is 12.27%. ROE is 7.74%, higher than the Consumer Packaged Goods industry's 10-year median of 5.99%.
Its current total return is well below that of McCormick's. Over the past 10 years, the growth in its share price has averaged 3.04% per year, while its dividend yield is 0.87%, for a total return of 3.91% per year. To that, we might add 1.2% for average reductions to the share count.
Summing up, Tootsie Roll measures up well on its fundamentals and a path to profitability is in sight, presuming one or more of the Covid-19 vaccines leads buying habits back to what they were pre-2020. For investors who agree with that thesis, the company is currently available at a discount price.
Conclusion
Two food companies, McCormick and Tootsie Roll, are both available at prices below their recent highs. Both have reasonably good fundamentals and are positioned for growth in the longer term. One area of significant difference is in their total returns, where McCormick does much better.
In the shorter term, investors will want to study McCormick's debt situation and Tootsie Roll's recovery from the pandemic.
Their share prices have not pulled back enough to make them clearly value stocks, but they have potential and are available for less than their recent highs—at least temporarily.
Disclosure: I do not own shares in any of the companies named in this article.
Read more here:
- 4 Additions to the Buffett-Munger List
- Raytheon CEO Rewarded for Buying His Own Company's Shares
- What's the Attraction of Bluebird Bio?
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
