The stock of McCormick (NYSE:MKC, 30-year Financials) is estimated to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $90.23 per share and the market cap of $24.1 billion, McCormick stock is estimated to be fairly valued. GF Value for McCormick is shown in the chart below.
Because McCormick is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 4.2% over the past three years and is estimated to grow 5.58% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. McCormick has a cash-to-debt ratio of 0.05, which is worse than 88% of the companies in the industry of Consumer Packaged Goods. GuruFocus ranks the overall financial strength of McCormick at 4 out of 10, which indicates that the financial strength of McCormick is poor. This is the debt and cash of McCormick over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. McCormick has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $5.9 billion and earnings of $2.835 a share. Its operating margin is 18.39%, which ranks better than 90% of the companies in the industry of Consumer Packaged Goods. Overall, GuruFocus ranks the profitability of McCormick at 8 out of 10, which indicates strong profitability. This is the revenue and net income of McCormick over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. McCormick's 3-year average revenue growth rate is in the middle range of the companies in the industry of Consumer Packaged Goods. McCormick's 3-year average EBITDA growth rate is 11.4%, which ranks better than 67% of the companies in the industry of Consumer Packaged Goods.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, McCormick's return on invested capital is 8.19, and its cost of capital is 3.97. The historical ROIC vs WACC comparison of McCormick is shown below:
In conclusion, the stock of McCormick (NYSE:MKC, 30-year Financials) appears to be fairly valued. The company's financial condition is poor and its profitability is strong. Its growth ranks better than 67% of the companies in the industry of Consumer Packaged Goods. To learn more about McCormick stock, you can check out its 30-year Financials here.
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