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Robert Stephens, CFA
Robert Stephens, CFA
Articles (396) 

Why McCormick's Stock Could Surge Higher

The company's strategy may boost its financial performance

March 29, 2019 | About:

Even though the share price of spices and flavors specialist McCormick & Co. Inc. (NYSE:MKC) has risen 40% in the last year, further growth could be ahead. The company is focusing on product innovation, pivoting to cleaner-label products in order to keep up with changing consumer tastes.

Additionally, the company’s partnership with BuzzFeed Tasty could increase its reach among younger customers. With the use of artificial intelligence, it may become more efficient and be able to innovate at a faster pace.

Although there is uncertainty facing the retail industry, the company’s long-term growth potential suggests it could offer investment appeal.

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Innovation

An increasingly innovative approach to its product range could strengthen McCormick's competitive position at a time when consumer tastes are evolving. The company is seeking to deliver a larger number of healthier options that offer greater transparency in terms of their source of ingredients. They include meal solutions such as the Zatarain’s Garden District Kitchen range, which is plant-based and high in protein. Similarly, the company’s range of Ducros herbs in France places greater emphasis on provenance and local sourcing.

As part of McCormick’s shift toward healthier options, it recently relaunched its clean and natural platform, FlavorReal, providing a range of natural flavor solutions in the growing clean flavor space. It is also set to ramp up the use of its FlavorFull proprietary modulation technology, which solves common flavor challenges without sacrificing the overall flavor of the product. Its patented FlavorCell encapsulation technology, along with its FlavorSpice technology, may also provide a competitive advantage versus industry peers as consumers seek bold flavors that have clean labels.

Growth potential

In the most recent quarter, McCormick launched a global partnership with BuzzFeed Tasty, which is the biggest cooking video website in the world for millennials with over 2 billion views per month. The partnership is expected to improve the company’s exposure to potential customers, since it is the official spice in the videos and recipes that appear on the site. The deal has the potential to increase its exposure to a younger audience, while also accelerating the growth of its digital platform.

Changes are being made to McCormick's marketing program as it seeks to maximize spending. For example, in the last quarter, it funded an increase in its working media with decreases in its nonworking spend. Its newly formed marketing excellence organization is expected to further optimize its brand marketing spend, while driving greater speed and effectiveness. This could enhance its competitive position and lead to a more efficient business model.

Threats

McCormick has reported an increase in expenses in recent months, with higher labor and transportation costs having the potential to squeeze margins. At the same time, sales growth may also come under pressure. Consumer confidence is forecasted to decline further over the course of 2019, following a weaker-than-expected reading in March. Not only could this produce downgrades to the growth potential of the wider sector, but it may cripple investor sentiment in the short term.

The company is seeking to improve its efficiency in order to reduce the impact of rising costs. As part of this plan, it has partnered with IBM (NYSE:IBM) to pioneer the use of artificial intelligence in flavor and product development. It will use proprietary technology to explore flavor territories more quickly and efficiently to extract key insights for millions of data points across sensory science, consumer preference and flavor palette. This could not only reduce costs, but also increase the pace of development, thereby strengthening the company’s competitive position.

Outlook

With McCormick forecasted to record a 7.7% increase in earnings per share next year, its price-earnings ratio of 21 may seem difficult to justify. The company, though, appears to have a sound growth strategy that could lead to improving financial performance in the long run.

For example, its increasing use of innovation may allow it to more effectively adapt to changing consumer tastes. The partnership with BuzzFeed Tasty will help expand its exposure among younger consumers, while its adoption of artificial intelligence may improve its efficiency during what could prove to be an uncertain period for the wider segment.

Having significantly outperformed the S&P 500 over the last year, there could be further growth ahead for McCormick's stock.

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