Summary
- We most recently got behind the name at the very beginning of April, but locked in profit in the summer while keeping a house money position on.
- MKC remains a solid beneficiary of the stay-at-home-and-cook trend, helping offset the pain from the other commercial businesses.
- The long-term fundamentals remain intact and we like the idea of the stock split.
- Valuation is still stretched so wait for the next pullback.
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- Prepared by Chris, CEO Quad 7 Capital and Team Leader At BAD BEAT Investing
McCormick & Co. (NYSE:MKC) is a name that we have traded a number of times in the past. Earlier this year, we recommended the name at the beginning of April. We felt there was potential for strong returns during the market turmoil under the thesis that "people need to eat." We had highlighted a few defensive food names at that time, all of which fell less during the crisis and saw businesses boom with stay-at-home trends. The company took a hit from restaurant closures, or restaurants only being available for takeout/delivery, during the COVID-19 crisis, but more people were cooking at home.
Some abatement has been seen in the commercial space but there is much more to go. So we started buying at $130, $135, and started taking profit in the high $170s. Make no mistake, it was not because we were bearish, although there was a stretched valuation, but it was more so because that is prudent portfolio management. We kept a position. That said, we think you should wait for the name to drop at least 10 points before considering buying again. The company continues to be a beneficiary of the eat at home trend, as evidenced by the just reported Q3 which we will discuss.
Our take on Q3 sales
The stay at home thesis continues to play out here. Sales in Q3 were impacted by COVID-19 which turned consumption patterns upside down versus a year ago. Business sales got hit hard, while the everyday consumer drove sales. The company delivered some decent results. McCormick's third quarter sales were up 8% compared to the year-ago period. In constant dollars, sales grew 9%.
The consumer segment saw a 15% benefit, while currency impacted things slightly. Regionally, sales we pretty bifurcated. In Asia/Pacific consumer sales fell 9%. They rose in the Americas and EMEA. Consumer sales in the Americas jumped 17%. In EMEA they spiked 23%. This was a result of the stay-at-home trend that we discussed in April.
We also talked about how the Flavor Solutions segment would see pressure from lockdowns and forced restaurant closures, or takeout only. Flavor Solutions saw sales fall 3%. Once again we will reiterate that the company continues to see growth because each year it comes out with new and exciting products that are usually well-received, and the company continues to effectively market its classic products, but this year, the declines were entirely driven by closures.
