Before the pandemic, relative to earnings spice maker McCormick was usually the most expensive large-capitalization stock in the food sector. There were a few reasons for this, including a long-successful program of cost reduction and potential benefits from acquisitions (most notably the 2017 purchase of Reckitt Benckiser’s food division, which brought on French’s mustard).
But, at its core, the case for paying up for McCormick stock rested on the idea that the company stood out from its industry in a key way: its end markets were growing with younger customers.
For most manufacturers, the concern at the time – which indeed played out – was that legacy brands would lose their luster for later generations more skeptical of homogenous, undifferentiated products. In contrast, McCormick’s spices, seasonings, and hot sauce met the demand of younger buyers for spice and heat, as well as global flavors.
But this decade, McCormick’s results haven’t lived up to investor expectations. Even with dividends, investors have lost about 13% of their capital since the end of 2019. Like so many players in the space, McCormick was a huge beneficiary of the coronavirus pandemic, but the pre-2020 thesis that its categories would drive above-market volume growth fell flat. Across fiscal 2022 and fiscal 2023, volume in the company’s consumer business plunged 13%.
The company’s Flavor Solutions segment, which serves multinational manufacturers and foodservice, has struggled as well.
The Case for McCormick Comes Back Around
Lately, McCormick has started to find its footing. Americas consumer volume grew a bit over 1% in fiscal 2024 and appears to be tracking to a similar figure this year. After several quarters of lost market share (by the company’s own admission), The Flavor Solutions business too has stabilized.
What’s interesting beyond the numbers, however, is that McCormick management is making largely the same pitch now that it did last decade. At an Investor/Analyst Day event last year (the first since 2017), management pointed to heat as a driver, pointing out that about 20% of sales came from that platform.
That trend of course was a big reason why McCormick purchased Frank’s Red Hot in the first place, and added Cholula in late 2020. Continued cost management remains a focus; so does innovation. Into this year, McCormick management has continued to insist that its categories are stronger than most, and that within that category the company remains the leader.
Heat, Innovation, and Youthful Palates
The McCormick stock price shows that investors remain skeptical – but there’s reason for optimism as well. While post-pandemic results have disappointed, on the whole this decade McCormick does appear to have outperformed food industry peers. Stable revenue in Flavor Solutions, as the company has pointed out, is reasonably strong performance given declining foot traffic at restaurants (and pressured volumes at manufacturing customers).
In other words, this still looks like a relatively attractive business. Stumbles in 2022 and 2023 – among the most volatile years in food in decades – are understandable. Gen Z and Gen Alpha tastes do seem like they should work in favor of McCormick.
The old bull case for McCormick admittedly didn’t work; but the new bull case might, even if it’s mostly the same.
About the author: Vince Martin is an analyst and author whose work has appeared on multiple financial industry websites for more than a decade; he’s currently the lead writer for Wall Street & Main. He has no positions in any securities mentioned.
Food for Thought Leadership
This Episode is Sponsored by: Koelnmesse
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