UNIVERSITY OF OREGON INVESTMENT GROUP

February 25th, 2010 Consumer Goods

McCormick & Company, Inc.
HOLD
Stock Data Price (52 weeks) Symbol/Exchange Beta Shares Outstanding Average daily volume (3 month average) Current market cap Current Price Dividend Dividend Yield Valuation (per share) DCF Analysis Comparables Analysis Target Price Current Price Summary Financials Revenue Net Income Operating Cash Flow (2010) $3,336.8M $370.2M $242.3M $36.70 – $47.83 MKC / NYSE 0.43 132.96M 700,491 6,113M $46.06 $1.12 2.50%

$46.13 (50%) $36.98 (50%) $41.56 $46.06

BUSINESS OVERVIEW McCormick & Company Incorporated was established in 1915 in Maryland as the descendant of a small spice and food company that was originally founded in 1889. Today, McCormick has established a respected brand name for flavor and is the global leader for manufacturing, developing and distributing high quality spices, seasonings and flavorings for a diverse selection of food found throughout the World. McCormick has an established name in the US
Covering Analyst: Michael Wolfington Email: mwolfing@uoregon.edu

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2 . seasonings and herbs with 40 to 60 percent market share of sales. university of oregon investment group http://uoig. “Simply Asia”. dairy products. McCormick Global Locations To provide a unique array of flavors. McCormick plans to continue to combatant any price fluctuations by purchasing strategic raw material purchases in the immediate and for future delivery from its many distributors to maintain a price advantage in the industry and avoid commodity price fluctuations. In 2010. For the products within its consumer segment it is the category leader for spices. grocery stores.500 full time employees through the world at its various production and distribution locations and was named by Forbes as one of the top 100 companies to world for in 2010.9% through its production of various herbs. South Africa and Australia. Customers space a variety of retail outlets in over 100 countries including. Central America. “Old Bay”. Raw materials such as dairy products and vegetables are produced and manufactured within the US from multiple suppliers. coatings. McCormick’s consumer business segment has an overall higher profit margin at 79% of operating income. wheat. Management states that they are not aware of any government regulations or factors that would have strong impact on the availability of these ingredients. sauces and specialty foods. and Walmart which accounted for roughly 10% and 11% of net sales respectively. China. “Lawry’s” and other numerous product lines. warehouse clubs. wet flavors.McCormick & Company. McCormick’s long standing reputation and customer relationship has helped to solidify a customer base that has been established in many cases for multiple decades. soybean oil and other spices and herbs. Inc. “Club House”. A few large corporate conglomerates account for a large bulk of net sales including Pepsi Co. spices. The industrial segment wholesales large quantities of natural blends of herbs and spices. McCormick’s consumer segment provides a majority of annual sales at 59. The company’s two business segments include consumer and industrial products. McCormick & Company receives various ingredients from all areas through the globe. McCormick currently employs over 7.edu and various European countries which provide a bulk of its production and sales of its products. It has additional production and distribution facilities located in Thailand. Inc. “El Guapo”. garlic. “Thai Kitchen”. seasoning blends and compound flavors to global food manufacturers. seasoning blends. extracts. and various distributers and wholesalers. drug stores. 61% of sales were located within the United States.uoregon. These products are distributed globally through a number of different brands including “McCormick”. The most important ingredients used include pepper. marinades. onion. A majority of these spices and flavors are received from foreign countries outside the US and the UK.

Management expects this new product line to increase sales by over $100 million in 2011.7 million. through continual acquisitions McCormick & Co. management of multiple business units and several executive management positions both domestically and internationally. and 2008 were $52. He received his education from the University of Tennessee in 1980 with a degree in communications. Wilson Alan Wilson has been President. MKC currently acquires a substantial market share of 40% of the spice and seasoning industry due to its ability to offer unique. one-third organic growth from product R&D and one-third from acquisitions.McCormick & Company.9 million. 2009. and $51.uoregon. He currently is the President of the University of Tennessee Alumni Association and multiple boards in the greater Maryland area. These R&D locations are developed organically and through continual acquisitions depending on locations and scale. In addition to innovation. marketing received an increase of $21 million to develop and promote the quality and diverse selection of McCormick products. Prior to working for McCormick Alan held similar positions working for Proctor and Gamble developing his skill set. El Bravo brand is a similar partnership acquisition established in 2010 to target Hispanic customers within the US.02% stock of MKC which equates to $0. high quality. MANAGEMENT AND EMPLOYEE RELATIONS President & CEO – Alan D.0 million respectively.9 million. A current partnership acquired at the end of 2010 with Eastern Condiments has expanded its reach into India. Research and development continues to be a main focus of the company with increased investments at new locations through the world. share gains and new distribution. Management has stated that in the long-term they expect to receive one-third company growth from category growth. in addition to small “street” fairs in China.edu McCormick & Company’s growth strategy is to continue to increase sales and product profitability by organic growth and through funding company investments within improved margins. Alan has been an employee of McCormick since 2003 and has served a variety of roles including operations management. Lastly. Marketing expansion in 2010 allowed MKC to expand its distribution locations to new warehouse locations in the US and the UK. Inc. In 2010. Continual innovation is a large focus of the company which it places a large amount of funding towards. CEO and Chairman of McCormick & Company since being elected by the board of directors in 2008. He currently owns 0.844 Million. The diverse selection of global R&D locations allows McCormick to continually seek unique brands and flavors that extend its influence into new emerging markets. and convenient products to a global customer base. plans to expands and diversify its product selection and acquire sales growth in new markets. New products from 2008 through 2010 currently account for roughly ten percent of net sales for 2010. McCormick places a large emphasis on marketing of its diverse selection of flavorings. $48. 3 . Research and development for 2010. BUSINESS AND GROWTH STRATEGIES university of oregon investment group http://uoig. His 2009 total compensation from McCormick totaled $4. Twenty percent of sales for 2010 were received from companies acquired within the past ten years. Partnerships provide another dimension of expansion for the company into new markets.

Mojave Foods Corporation Initiates Recall – Business Wire – December 08.” Zachs.7%.” McCormick & Co. Fortunately. Sales 4 . to best leverage the company’s capabilities with U. 2010 “McCormick & Co Inc. no lawsuits or wrong doing was caused by this incident however. most recently Senior Vice President. and analysts are calling for 7% EPS growth. In his role. RECENT NEWS university of oregon investment group http://uoig. He became Vice President – Finance for McCormick’s U. The following numbers show the continued success and growth of McCormick despite it already obtaining 40 to 60% of market share of the industry. Incorporated (NYSE:MKC) has been appointed President of McCormick’s Asia Pacific Zone.uoregon.S. trading at 15. McCormick recently hiked its quarterly dividend 7. To date. 2010 “Mojave Foods Corporation is initiating a recall of sixty (60) packages of El Guapo Shelled Walnuts 1 OZ. Rick Morse was appointed Vice President.S. Visalia.5x. Beard joined McCormick more than 28 years ago and spent most of his earlycareer in the accounting and finance roles in McCormick’s U. Finance and Treasurer for McCormick and Company. has contracts and receives continual food ingredients from Mojave Foods in regards to a number of food products including walnuts. Incorporated’s (NYSE:MKC) U. as they expand in International markets.edu McCormick Delivers Spicy Taste of Global Growth – Forbes. Finance and Treasurer and was promoted to his most recent position five years later.com continues to provide analysis of multiple companies their analyst are confident will continue to provide healthy returns.S. because we were advised by the supplier that the ingredient has the potential to be contaminated with Salmonella. Ed Landry has been promoted to Vice President. 2011.” Changes within McCormick Consumer Sales Organization – Business Wire – January 07. Mr. He was made Vice President and General Manager of the U. Rick will lead McCormick’s initiatives to drive sales with customers based in the U. Despite the run up.S. The stock is up about 20% since July 1. The company expects to grow sales 5% to 7% in 2011. The appointments were made to align McCormick’s organizational strategy. Global Customers USCPD. below the industry average of 16. It is a Zacks #2 Rank (Buy) stock. the stock took a minor hit for a short period which is similar to previous food recalls in the past. shares are still reasonably priced. It currently yields 2.8% since 2008. he became Vice President. The recalled product was distributed only in southern California and sold in retail stores. effective January 1. California. no illnesses have been associated with this Mojave product. manufactured with walnuts supplied by Atlas Walnuts. Inc. Expectations for the fourth quarter and 2010 as a whole were met with impressive numbers despite a downward sloping economy. retail business. It currently yields 2. The following product is being recalled.S.-based and global strategic customers. Industrial business in 1996 and was promoted to President of McCormick Canada in 1997.com – January 28th.McCormick & Company. This continues to be a risk of the company when dealing with suppliers.S. 2011 “New appointments have been made within McCormick and Company.9x forward earnings. date code 5527.4%. Beard Appointed President of McCormick’s Asia/Pacific Operations – Bloomberg – January 07. Industrial Business. McCormick has also been steadily raising its dividend.4%. (MKC – Analyst Report) recently delivered its 7th consecutive positive earnings surprise driven by strong sales growth in the Asia/Pacific region. It has raised it at an average annual rate of 10. In 2002. Consumer Products Division (USCPD). 2011 “Paul Beard.

Industrial purchases from this industry have also seen relative increases from the economy towards the production of prepared meals and introductions of new products. This increase has also been spurred by the changing ethnic makeup of the US population driving demand for new diverse flavor combinations. Consumer Products Division. This trend has favored the industry as a whole due to a majority of its products being spices. Stickevers.” said Mr. President U. evolving ethnic food preferences and a mature marketplace. salt and seasonings are used in the consumption of home cooked meals for preparation of various meats.2% per year accounting for $2.McCormick & Company. it is crucial that they place a large emphasis on innovation towards new. the industry has received fairly consistent growth in revenues and profits despite facing a number of economic challenges including increasing commodity prices. lower consumer spending levels. McCormick & Company. 5 . Both positions will report to Ken Stickevers.00 billion dollars. These larger players within the industry have a large advantage within the industry to capitalize on the value added during the production process and brand loyalty provided higher margins. increased branding and recipe promotion. This is a key core competency that has continually helped to separate MKC from its competitors allowing it to maintain 21% market share.uoregon. Despite efforts to increase margins. being the industry leader. in addition to aggressive marketing and strategic alliances with suppliers and distributors. fresh ingredients.edu USCPD. INDUSTRY Current Performance Despite the weakening global economy the spice. snacks and salads. Unilever and Kraft Foods Inc hold the second and third largest market share at eight and seven percent respectively. herbs.S. university of oregon investment group http://uoig. seasoning and sauce production industry has remained resilient for the past five years. In order for larger firms to remain competitive within the industry. Participation and growth of establishments has increased annually by 1% during this time period to a total of 653 companies. “Rick and Ed are both passionate business leaders who each bring strong leadership skills to their new positions. Since 2005. During the five years to 2010 the industry has seen moderate expansion within the global recession. the five years leading up to 2010 have seen industry profits before taxes decrease by roughly 3. Ed will lead customer teams and broker partners responsible for growing McCormick’s business with retail grocery customers. Incorporate currently holds 21% of the market share within the Seasoning.” Management has stated the importance of their sales team and marketing of the McCormick brand going into the future. Inc. The industry is dominated by a few large players that obtain a large percentage of market share and control within the industry amongst distributors and producers. These economic factors have forced consumers to place a higher emphasis on preparing and eating food at home in order to save money. Sauce and Condiment Industry within the U.S. I am excited about the growth these new roles will enable for our customers and McCormick.

3% annually through 2015. a majority of the growth will come in conjunction to population increases and immigration into the U. The industry as a whole is expected see estimated net profits of 14% of revenue by 2015 which equates to annual earnings growth of 2. university of oregon investment group http://uoig.McCormick & Company. Due to the industry being well established and mature. During this same period the supermarket and grocery store industry is expected to see a slight decrease in growth to 0.S. Industry Outlook The Seasoning. Demand internationally is expected to increase most noticeably in Canada and Mexico. Increasing technology within the production of food ingredients will increase margins in the future for larger players within the industry. This includes an increased demand for changing ethnic flavors and ingredients. Price sensitive consumers will continue to assist industry growth through their demand for homemade food consumption. in addition to continual innovation for new tastes. various European countries and Saudi Arabian is expected to increase substantially in the future beyond 2015. Wages of employees have grown faster than the increase in employment due to a higher demand for qualified human capital investments in production and technology. Industry revenues are estimated to increase at an annual rate of 0.7% during the five years to 2015 totaling $15.edu Employment within the industry has follow suit growing at a rate of 0.3% to 2010 with a total of 31. 6 . Many of the drivers for growth seen from 2005 to 2010 will continue to promote growth through 2015. This is largely contributed to the expected 1. Inc. Sauce and Condiment Production industry is expected to see similar growth during the next five years through 2015.uoregon.90 billion dollars. will slowly pull out of the recession and consumers will have a slightly less focus on saving money cooking from home and place a higher emphasis on takeout and restaurant meals.200 workers nationally. International growth within the industry is expected to be a positive catalyst for growth into the future. This is largely contributed to economic expectations that the U. Production volumes of consumer ingredients are expected to increase during the next five years.2% per year.0% through 2015. Exports within the spice and seasonings industry are expected to increase at an annual growth rate of 9.5% increase in price for domestic processed foods leading up to 2015. while demand in Australia .S.

Weaknesses   Product & ingredient recalls decrease brand image. thus making imports cheaper which has the ability to decrease demand for domestic vegetable purchases. Secondly. Opportunities   Threats    Currency exchange rate fluctuations may negatively affect financial performance. 7 .S. Increase demand toward healthy nutritional foods. the cost of transportation will directly increase the price of vegetable commodities. Inc.edu Price of Vegetables – Domestic Industry experts predict that as the economy improves over the next few years. However. Demand for healthier eating habits in addition to increased desire for organic production has the ability to increase prices. Large portfolio of established brands with customer loyalty. Higher percentage of consumers preparing in-home meals. university of oregon investment group http://uoig. if the price of oil increases into the future as anticipated.W. S. A few key customers provide a large percentage of company sales. Large number of competitors within the Spice.T.McCormick & Company. Large focus on R&D continues to develop new products and increase. Healthy relationship with supply partners and global distributors. U. the US government is expected to raise interest rates in 2012 to 2013 which will improve the value of the dollar. ANALYSIS Strengths     Leading international market position at an estimated 21% market share. Increased oil prices increasing transportation costs.7% through 2014. Herbs and Seasonings Industry. restrictions on imports and exports should keep prices fairly consistent with an expected annual increase rate of 0. This could lower prices during this period which could also receive an additional decrease influence if the US government chooses to remove vegetable growing regulations.O.uoregon.

Companies such as Walmart and large distribution chains have the ability to strategically consolidate in order to leverage their buying power from wholesalers such as McCormick and Company. Buyers within the seasoning and spice industry have a large amount of purchasing power depending on their size from these producers. demand tailored products. Consolidating within the US and the European Union allows these companies to resist price increases. McCormick has not used derivatives to manage risk however. Degree of Rivalry – Medium Evaluation of the four factors stated above. Food manufacturing for these larger firms is more cost efficient due to their increased availability of suppliers. Firms have generally been established for a long period of time which has allowed for developed relationships with customers. in addition to advanced technologies to improve margins giving a higher competitive advantage. political instability. 8 . Inc. Buyer Power – High The food industry is highly competitive with a number of key players providing a large bulk of sales on a national and international scale. Barriers to Entry – Medium/High The food and spice industry is highly competitive with a number of large conglomerates that have obtained strategic agreements for distribution both domestically and in an international basis. competition is highly based upon price. innovation and brand recognition.edu Ingredients and materials purchased from suppliers have the ability to fluctuate in price and quantities depending on commodity price changes and location. These changes can occur due to variability in the market. decrease inventories and shift shelf space towards private labels. quality. Companies continually face a large amount of pressure to provide continual product innovations for a lesser cost.uoregon. government regulations and other factors internationally beyond McCormick’s control. in addition to purchasing large quantities for future delivery. weather and growth conditions. PORTER’S 5 FORCES ANALYSIS Supplier Power – Medium university of oregon investment group http://uoig. McCormick operates in a highly competitive industry in which larger firms receive a substantial competitive advantage due to the availability of increased resources. Threat of Substitutes – High Due to the availability of many food distributors and competitors within the food industry.McCormick & Company. as stated they continue to put forth an effort to leverage their many international distributors. product array. it is essential that they place an emphasis on technology and improved production techniques in order to produce foods at lesser costs yielding higher margins. In order to stay competitive. improve production technologies and distribution channels. These factors give McCormick customers a large amount of buyer power.

EV/Gross Profit and EV/EBITDA. Net Margins for Campbell’s were roughly seven percent larger. COMPARABLES ANALYSIS university of oregon investment group http://uoig. Its customers include retail food chains. Inc. New Jersey. as well as in the Russian Federation. convenience stores. China. Valuation Metrics For my comparable analysis I used four valuation metrics each with an equal weighting. and bakery and frozen products in the United States. In addition. H.com) Campbell’s currently has the lowest beta of the comparables at 0. The five companies I identified were Campbell Soup Company. pasta sauces. broth. crackers. Inc. Both company’s beta’s in addition to gross and EBIT margins were very similar. and therefore it was not used. sauces. Soup. Campbell Soup Company was founded in 1869 and is headquartered in Camden. EV/Operating Cash Flow.M. mass merchandisers. stocks.edu To identify McCormick’s competitor and comparable companies I placed a focus on identifying companies with an international focus that compete for the same shelf space of McCormick’s many customers. and commercial and non-commercial establishments. Latin America. and Beverages segment offers condensed and ready-to-serve soups. and tomato juices. mass discounters.S. and beverages in Europe. Mexican sauces. club stores. CAMPBELL SOUP COMPANY (CPB) – 25% “Campbell Soup Company. such as soup. Its North America Foodservice segment distributes various products. beverage products. 9 . I also placed a large focus on the similar risks of my comparables in regard to international and domestic fluctuations. These companies share a large number of distributors and customers internationally and deal with fluctuations in sales due to seasonality. gravies. the risk levels of both companies both domestically and internationally provide an accurate comparable analysis between the two. My comparable analysis provides a target price of $36.J. I had initially hoped to evaluate EV/Free Cash Flow however. These companies were weighted differently based off of their similarities of margins and risks associated to McCormick and Company. Sauces. My Metrics included EV/Revenue. and beans. and biscuits in Australia and the Asia Pacific. Smucker Company. The company’s U. juices and beverages. other prepared foods. ConAgra Foods. Heinz Company. as well as through broker and distributor arrangements.” (Yahoofinance. and Canada.uoregon. together with its subsidiaries. and the Asia Pacific region. and farm products through various food service channels in the United States and Canada. and Beverages segment offers soups. and canned poultry. engages in the manufacture and marketing of branded convenience food products worldwide. drug stores and other retail. specialty entrees. Sara Lee Corp and J.27 which was received through a five year regression.84 in comparison to MKC current price of $46. an outlier provided by Sara Lee Corp having a small amount of free cash flow provided an inaccurate projection. The company markets its products directly. The company’s International Soup. Its Baking and Snacking segment provides cookies.McCormick & Company.06. Sauces. canned pastas.

beans and pasta meals. soups. hospitals. DAVID. INC. private label. Nebraska. entrees. snacks. Heinz currently has a beta of 0. Pennsylvania. and flavors. H. and desserts. which are sold in various retail and foodservice channels. and research and other facilities. and distributors to grocery accounts.com) McCormick and Conagra currently compete within the same segment of sauces and condiments however. pharmacies. It offers products in the categories of meals. and the Middle East. and industrial customers.edu CONAGRA FOODS. frozen food. It operates in two segments. convenience stores. bakeries. ACT II. Latin America. Blue Bonnet. Snack Pack. and frozen. Inc. and Wesson brands.42. Consumer Foods and Commercial Foods. condiments. Swiss Miss. and various government agencies.J. J. EBITDA margins and net margins for both companies are quite similar. Europe. this accounts for only a percentage of ConAgra’s annual revenue. 10 . The company was founded in 1869 and is based in Pittsburgh. This segment sells its products under the as ConAgra Mills. distribution centers.56 in comparison to MKC’s beta of 0.McCormick & Company.” (Yahoofinance. Africa. Heinz Company provides similar condiments and sauce that compete with the products of McCormick and company in addition to frozen entrees and packaged foods. Inc. university of oregon investment group http://uoig. Healthy Choice. and shelf-stable temperature classes. Marie Callender’s. and customized food products. operates as a food company in North America and internationally. Orville Redenbacher’s. Hebrew National. Both companies have production and distribution facilities internationally within many of the same geographical locations. including hotels. The Commercial Foods segment provides commercially branded foods and ingredients principally to foodservice. foodservice. It offers ketchup. Peter Pan. Chef Boyardee. Banquet. (CAG) – 15% “ConAgra Foods. desserts. infant nutrition. ConAgra produces and sells various types of premade meals and frozen entrees. the Asia Pacific. The Consumer Foods segment provides branded. Van Camp’s. club stores. frozen potatoes. sides. seasonings. agents. and institutional customers. various vegetable products. food manufacturing. In addition to these products. currency fluctuations and foreign instability and production. Reddi-wip. blends. and Spicetec brands.J. snacks.com) H. Egg Beaters. and distributed internationally as well which allows the companies to face the same risks in regard to customer relations. independent brokers. This segment offers its products under the Alexia. health-care facilities. It sells its products through its sales organizations. Lamb Weston. appetizers. HEINZ COMPANY (HNZ) – 25% “H. mass merchants. warehouses. Heinz Company manufactures and markets food products for consumers. as well as to institutions. and foodservice distributors.uoregon. and other processed food products. restaurants. Slim Jim. Risks associated to fluctuations in sales and ingredient costs are also quite similar for both companies. The company was founded in 1919 and is headquartered in Omaha. The company also owns or leases office space. J. These products are produced. Heinz Company has operations in North America. entrees.” (Yahoofinance. Its primary products include specialty potato products. refrigerated. condiments and sauces. milled grain ingredients. ConAgra has a much smaller gross margin than that of MKC in addition to its EBITDA and Net Margin. Hunt’s. H. PAM.

Pet. Dunkin ’ Donuts. and other institutions through direct sales force and outside brokers. sandwiches and bowls. M. CroustiPate. Softasilk. W. Ball Park. and liquid coffee. Sara Lee Corporation was founded in 1939 and is based in Downers Grove. Jimmy Dean. discount and dollar stores. It also offers fresh and frozen baked products. Douwe Egberts. Senseo. breakfast sausages. Knudsen Family. as well as refrigerated dough products. Sara Lee sells its products to mass retailers. cappuccinos. The J. turkey. Café Pilão. Hungry Jack. Plate Scapers. Santa Cruz Organic. Heiner’s. State Fair. club stores. warehouse clubs. drug stores. as well as through foodservice distributors and operators. These two companies do not compete directly but still face a majority of the same risks and changes within the food industry. Pickwick. and BonGateaux brand names. pastry. fruit spreads. hospitals. Maison du Café. Laura Scudder’s. and beverage products worldwide. Recharge. M. San Luis Sourdough. Marcilla. White Lily. Its principal products include coffee. Ortiz. Pillsbury. Smucker Company was founded in 1897 and is head quartered in Orrville. and Red River brand names. and through retail channels. Sun-Maid. frozen sandwiches.com) 11 . ground. Its packaged meat products include hot dogs and corn dogs. desserts and coffee products.M. and cooked ham. Crosse & Blackwell. SMUCKER COMPANY (SJM) – 20% “The J. The company was formerly known as Consolidated Foods Corporation and changed its name to Sara Lee Corporation in 1985. and other desserts. juices and beverages. Rainbo. Snack’n Waffles. and health and natural foods stores and distributors. Café Caboclo. such as restaurants. which comprise bread. Earth Grains. Double Fruit. buns. Smucker Company engages in the manufacture and marketing of branded food products in the United States and internationally. lattes. food wholesalers. cakes. Eagle Brand. Illinois. mass merchandisers.edu SARA LEE CORP. IronKids. Colonial. schools and universities. Mother’s. rolls. flour and baking ingredients. Bimbo. J. Uncrustables. Goober.uoregon. syrups. baking mixes and ready-to-spread frostings. cheesecakes. restaurants. It also provides its products under the LaPina. specialty bread. Carnation. Funfetti. Bick’s. mass merchandisers. Sara Lee provides roast. canned milk. and pickles and condiments. university of oregon investment group http://uoig.com) Sara Lee produces and distributes products to the many of the same companies as McCormick. The company sells its products through direct sales and brokers to food retailers. peanut butter. Dickinson’s. national chains. R. bagels. In addition. and military commissaries. dessert toppings. Sara Lee has lower margins than that of McCormick with a gross margin of 37%. bacon.McCormick & Company. frozen pies.” (Yahoofinance. and healthcare operators. in addition to its net margin of 5%. Golden Temple. however it places a higher emphasis on producing various types of bread.” (Yahoofinance. muffins. Merrild. Ohio. Sunbeam. beef. Holsum. and Magic Shell. Sara Lee. distributors. The company sells its products under Hillshire Farm. Europe’s Best. The company offers its products under various brands comprising Folgers. premium deli and luncheon meats. shortening and oils. pastries. Five Roses. (SLE) – 15% “Sara Lee Corporation engages in the manufacture and marketing of a range of branded packaged meat. and Martha White. bakery. and hot and iced teas. Robin Hood. Inc. Adams. Borden and Elsie design. smoked and dinner sausages. Crisco. Smucker’s. Jif. supermarkets.

16% in reference to McCormick’s current price of $46. industry outlook and analysts opinions. This growth should receive continued support as the company continues to evaluate acquisition opportunities which have proven to add diversification of sales across regions and to customer tastes. figures for the remaining margins were fairly correlated in addition to seasonality and sales growth internationally. I calculated a beta of 0. Management feels their revenue growth should stay between five to seven percent for the next two years. I used a percentage of revenue method to evaluate these historical trends and spent time evaluating recent changes implemented by the company both in the U.M. My projections were based off of expectations of consumer spending going into the future. McCormick has seen substantial growth in the past five years. Revenue growth within McCormick’s consumer segment is highly dictated by continued innovation of newer products in order to appeal to a larger customer base which should continue into the future. Secondly.uoregon. DISCOUNTED CASH FLOW ANALYSIS Within my discounted cash flow analysis I placed a focus on projections using management guidance which has historically been an accurate measure for the direction and growth of the company. McCormick’s beta of 0.06.S.32 beta which I felt was too low and felt the position of the company is much more correlated to the past five years in terms of market fluctuations and growth. Consumers demand for home cooked meals has increased as people substitute take out and restaurant visits in order to save money. 12 . company guidance. Inc. Management has put forth an effort to be more cost sensitive towards customers’ needs which it has improved through restructuring changes and improvements in technology production which will have an immediate impact on both segments at an estimated 3 percent. university of oregon investment group http://uoig.13 provided an undervaluation of. It should be noted that growth of the company has been volatile due to its large number of acquisitions in 2008 & 2009 which created a period of volatility in its metrics and sales increases of nearly fifty percent during the annual year. Beta McCormick has historically received a low beta due to its growth receiving a minimal influence off of market and economic fluctuations.65. I ran both a five and ten year monthly regression based off of returns against the S&P 500. Consumer Despite receiving increased pressures from the global recession. Revenue McCormick’s revenue is shown in two separates segments as a cumulative sum of domestic and international sales.43 from the five year regression for McCormick & Company and which I kept consistent for my comparables. It’s consumer segment has seen consistent growth over the past eight years and continue to be the bulk of its total revenue at 60%.edu The beta for J. management feels through key growth initiatives sales should increase in 2011 by 3-4 percent. and abroad. Net Margins for both comparable companies are the same at 11%.McCormick & Company. Cost cautious consumers should continue this trend going into the future however. The regression for the ten year provided a 0. The DFC analysis yields an implied price of $46. Smuckers was calculated similarly to MKC using a five year regression yielding a beta of 0. Industry analysts and management feel the next five year outlook should be fairly similar to the past five in regards to growth and returns.43 is similar to that of the five comparable companies. as the economy improves this demand should decrease slightly going into the terminal year.

Industry experts have stated that in order for companies to stay competitive in the future. McCormick continues to provide new flavors with a global influence which is provided through their international production facilities. this must be an increased focus for a competitive advantage.edu Industrial Industrial revenue should see less of an effect upon the economy going into the future in comparison to its joint segment of consumer products. SG&A has historically been a percentage of revenue at roughly 27 percent. Tax Rate During the past 4th quarter conference call. McCormick also continues to develop its relationship and contracts with large food chains which should add stability and mitigate risk going into the future. Increases in commodity costs and transportation will be offset going into the future through increased technology improvements for production and distribution of McCormick products. As large food producers and grocery chains continue to develop their own brand name for food products and ingredients going into the future. I continued this tax rate into perpetuity based off of their expectations for growth and continued acquisition outlook.5% of revenue which I have trending down into the terminal year. university of oregon investment group http://uoig. Cost of Revenue A large cost of revenue for the company comes directly from pricing fluctuations of agricultural commodities and dairy ingredients. In order to meet the evolving needs of its customers. sales should stay relatively consistent but modest for the industrial segment. Net Working Capital I projected McCormick’s current assets and liabilities based off of historical ratios and recent improvements implemented by management. In order to mitigate risk and avoid large fluctuations in ingredient prices.McCormick & Company. The growth of these large conglomerates will continue to have a direct impact on the company’s growth. management had stated that they expect a 31% tax rate going into the future. PepsiCo are well established and will continue to be profitable going into the future. however going into the future management has recently stated that this has the potential to increase depending on company needs and growth. McCormick purchases ingredients in bulk in order to maintain a cost of revenue which has historically stayed between 57 and 59 percent of revenue. Short term liabilities continue at an average projection of revenue at roughly 26% which has fluctuated slightly in years past based off of short term borrowings for large acquisitions. Due to large fluctuations of seasonality which is consistent with the industry due to the holiday season. Inc. Over the past ten years acquisitions have consistently been a large focus for company growth and management states that this will continue into the future. Selling and Administrative Expenses McCormick’s sales department has proven to be one of the core competencies of the company which it finances heavily in comparison to other industry competitors. Acquisitions Acquisitions continue to be a large focus for growth of McCormick and recent activities within the past ten years provide a large bulk of current revenues. Management has stated that this trend will continue in the future which I considered going into the terminal year. Recent restructuring changes have been an example of this in order to expand this influence within both domestic and international sales. Ingredient inventory and receivables are paid for through short-term borrowings. 13 .uoregon. Management feels its agreements with its key customers being Walmart. Current assets have historically stayed at roughly 30. management has historically increased its inventory during the third quarter.

56 $46.13 $41. Having been established since 1889. My comparable analysis provided an implied price of $36.06 9.98. Inc.edu Capital Expenditures Capital expenditures have historically been a consistent percentage of revenue which I projected into the future. university of oregon investment group http://uoig. During the past fourth quarter conference call. while receiving an implied price of $46.78%.06 to be overvalued by 9. I arrived at an implied price of $41. I also placed time evaluating the returns to investors over the past ten years and evaluating analysts opinions going into the future. Analysis Comparables Price DCF Price Weighted Target Price Current Price Overvalued Weighting 50% 50% Price $36. Given the reasons stated I am recommending a HOLD for all portfolios for McCormick & Company.McCormick & Company.13 from my DCF analysis. Going into perpetuity I increased this percentage slightly based off historical trends and to meet the needs of the company as it develops. management stated that its capital expenditures will be between 90 to 100 million dollar range.98 $46. Inc. Based off of my equal 50% weighting.56 which suggests the current price of McCormick at $46. the company has a substantial market share in comparison to its competitors and is rated as one of the 100 best companies to work for by Forbes Magazine.78% 14 .uoregon. RECOMMENDATION When evaluating potential companies. I was drawn to McCormick due to its continued growth and success despite the economic factors facing the company. I provided an equal weighting for these two valuations due to my confidence in my comparable companies in terms of risk and growth going into the future. in addition to growth expectations for McCormick going into the terminal year.

16 x 3.54 x 8.90 -$2.00 $0.00 $1.33 $63.336.19 x 16.60 1.305.00% 25.50 $1.73 $296.38 Median 37% 16% 18% 10% 44.78 $1.20 $793.89 $11.82 $36.00 $258.10 x 33.00 $0.33 $9.41 $584.00 $3.04 $6.24 1. university of oregon investment group http://uoig.90 Min 25% 8% 12% 5% 18.66 x 12.937.94 $3.90 50.073.134.26 0.61 $33.064.078.50 $0.49 0.25 37% 19% 23% 11% 18.27 $12.63 x 14.83 x 13.645.90 $387.920.167.00 $50.00 $577.00 $1.300.74 x 35.06 24.00 $1.44 0.37 37% 8% 12% 5% 36 0.60 $1.00% 20.553.98 $46.601.00 1.00 $0.23 x 4.30 $928.00% 15.54% 41% 18% 21% 18% 32 0.8 338 $6.60 $1.432.10 0.00 $546.50 0.72 $48.00 $4.90 x 4.30 2.61 0.32 2.00 $0.00% CPB CAG HNZ SLE SJM $46. 200 Day Moving Avg.30 $3.00 $1.42 $7.52 $43.780.501.00 $2.72 $19.00 $0.42 $8.76 $22.488.85 x 13.40 $2.04 28.46 $48.50 $1.edu The University of Oregon Investment Group ($ in millions.78 x 1.73 $47.6 322.08 x 17.80 x Weight 25. except per share data) Stock Characteristics Current Price 50 Day Moving Avg.00 134.02 x 43.946.8 0.879.78 x Weighted Avg.139.82 x 116.50 $1.818.87 $12.00 0.94 $3.00 $1.86 35.134.16 $51.00% 15.20 $665.00 $0.10 $44.846.50 $7.82 $15.00 441.5 0.06 $35.06 $45.21 10.43 $8.00 $1.49 x $10.18 x 9.55 45% 17% 17% 11% 52.38 $62.50 $1.28 2.00% $356.22 $2.56 $17.00% 25.53 x 9.90 $387.903.192.00 $535.00 Avg. 37% 15% 18% 10% 43.385.21 58.030.903.40 $4.00% 25.696.00 x 48.28 x 8.70 25% 10% 13% 5% 56.03 x 38.13 1.00 $110.12 $885.59 $14.858.350.389.00 $395. (MRQ) Minority Interest Market Value Preferred Stock Diluted Share Count Market Cap Enterprise Value Profitability Margins Gross Margin EBIT Margin EBITDA Margin Net Margin Credit Metrics Interest Expense (MRQ) Debt/Equity (MRQ) Debt/EBITDA (LTM) EBITDA/Interest Expense (LTM) Operating Results Revenue (LTM) OCF(LTM) Gross Profit (LTM) EBITDA (LTM) Free Cash Flow (LTM) Valuation EV/Revenue EV/OCF EV/Gross Profit EV/EBITDA EV/Free Cash Flow MKC 25.85 x 4.15 x 8.65 $1.739.13 1.05 x 11.00 $577.344.80 $4.00 $0.586.50 $525.138.uoregon.58 $34.56 $7.488.80 $1.80 $291.70 $898.50 $3.27 $12.77 0.445.50 $328. 1.34 58.28 x Metric EV/Revenue EV/OCF EV/Gross Profit EV/EBITDA EV/Free Cash Flow Price Target Current Price Over Valued Implied Price $35.00 $1.75 $293.27 1.40 $160.16 1.29 2.60 $1.117.97 32.18 37% 15% 18% 9% 67 0. Inc.050.83 $22.65 $0.138.00 $1.90 $3.70 $12.01 $17.98 x 5.045.736.04 Max 45% 19% 23% 18% 67.00 $779.030.08 x 36.29 x 4.40 0.00 642 118.971.125.00 $0.40 $545.5 $10.336.00 $0.00 $10.27 1.13 x 15 .90 x 15.09 x 4.83 $67.42 0.40 $110.35 10.27 $22.50 $17.50 $525.974.00 $2.62 $35.208.31 36.McCormick & Company.385.43 $33.90 1.34 28.4 $10.58 $15.00% 25.3 0.618. Beta Size ST Debt (MRQ) LT Debt (MRQ) Cash and Cash Equiv.99 x 10.32 2.00 $1.53 x 1.

93% Net Income $260.83% $36.83% 2.37% $179.45% $127.58% $834.197.28 4.87% 57.30% 58.67 2.20% 0.61 $413.99 $3.00 0.034.51 14.49% 41.47 $178.78% 31.35% $178.33% $1.80 26.58 2.93 42.67 $180.15 $106.70 $369.20% 11.15 27.59 27.75% 2.80 $3.39 26.87 -$228.00% $647.75% $17.33 14.41% 26.91 $2.00% 3.00% $1.20 $283.00 0.039.00% $2.484.80 -$6.00 0.35% $661.35% $176.89 $389.28% $28.280.85% $184.10 15.60% $694.58 $16.87% 27.24 Discounted Unlevered Free Cash Flows 1 2 3 4 5 6 2010 2011 E 2012 E 2013 E 2014 E 2015 E 2016 E $3.07 $1.94% 7.098.26% $1.76 15.68 $1.57% 0.00% 0.19% 15.20 $3.19 13.00 $12.85% $0.74 $1.65 $4.30 % Revenue 4.00% $481.49 $218.75% 2.619.183.22 0.00% $344.28 30.900.60 2.61 31.218.54% 1.10% 10.4000% $0.80 $82.78 13.256.25% $284.596.015.00% $493.10% 42.91 14.00% 0.254.69 3.83 0.68 $111.96 $4.80 $1.35 57.76 $1.00% 0.31 $1.60% $0.94 $2.10 $2.00 0.482.20% $1.27 2.48% 30.50 % Revenue 33.23 $2.10 $968.17 $5.28% 14.78% 1.80 % Revenue 2.95 $254.00% $0.00% $1.23 3.12 $109.45 15.08% 1.58 $1.00 1.42% 12.19 2.33% 10.27 $603.342.40% $183.26 0.47% $1.00 0.18% -2.63 16 .80 $237.00 $0.39 4.13 $427.70% 2.31% 13.00 $0.161.50 % Revenue 12.04 2.00% 0.80% 3.946.14 $13.48% 10.00% 3.85% 14.00% Restructuring Charges $0.07% 0.98 27.60 $133.30 4.714.18 3.00 $1.00% $0.10% 0.20 % Revenue 29.41% $176.73 27.55% 25.40% $188.00% 31.31 $999.08% Interest Expense $60.20 $100.83% 2.64 $285.10 26.83 $292.00% $578.00% $468.00 $0.00 0.74 13.85% 2.00% $612.20% $204.90 $911.28% 13.67% 2.63% 13.55 $102.00% 0.61 31.78 26.20% 0.80% $179.21% 26.49% $123.00% $509.70% $296.49% Cost of Revenue $1.63% Other (Expense) Income $28.61 57.25% 1.69% 2.40 $1.74 % Revenue 13.60% $1.13 25.28% 13.75% $146.87% 40.00 0.18 $174.673.77% Change in Net Working Capital $2.92 $541.4250% $0.edu The University of Oregon Investment Group ($ in millions.78 4.31% 11.88% Add Back Depreciation and Ammortization $82.75 26.66 14.72 $2.20 Gross Margin 40.60 $2.33 15.90 $1.59% $95.24% 26.14 $2.96% Current Assets $983.35% $118.10 $582.65 2.153.417.62 $11.226.64% 4.54% 32.63 15.59 27.00 $172.40 % Revenue 2.60 $218.13 1.30% 0.76 0.724.825.50 14.475.63 $139.20 27.85% $10.95% $2.85% $202.83% 2.343.268.068.00% $1.17 27.234.27 10.20 $1.40% Current Liabilities $861.55% 41.919.552.90 $950.01% 14.00% $628.05 10.78 $131.51% 58.26 2.37% $139.00 $337.university of oregon investment group http://uoig.30 % Revenue 2.47 $188.32 $411.90 $870.47% 8.60 % Revenue 27.70 $52.80% $17.85% 26.293.90% 57.05 3.91 $1.80 $416.71 $192.64 $115.226.60% 10.89 $113.97% $1.00% Unlevered Free Cash Flow $290.00% $562.288.02 0.23 $4.916.94 0.70% 2.46 McCormick & Company.268.430.65 $205.832.60 $3.05% 31.693.77 $39.439.00% $1.00% 0.00% 0.40 % Revenue 0.00 $0.88% $2.17 $362.84% $0.02 27.21% 26.89% 15.08% 3.96% 4.95% 42.10 Capital Expenditures $78.00 0.00% $642.00 0.75% 3.146.60 $94.352.00 $2.75% 26.91 $184.25% $289.133.66 $1.27 27.78 $248.45 10.00% $596.91% 0.90 29.38 $4.23 $316.30 $0.00% $0.00% 0.03% $221.43% 4.72 $2.757. except per share data) 2007 2008 2009 Total Company Revenue $2.00% 0.104.25% $642.60 27.08 13.864.83% 0.00% $0.40 $1.26 31.45 4.68 $121.00% $714.063.42% $131.00 $7.06% 4.13 14.352.78 $114.87 13.00 $0.15% $210.64 13.00 0.88 15.07% 4.27 27.56% $1.13% Operating Cash Flow $388.84% $0.30 $1.29% $1.00 0.10 $2.18 $89.86 $2.85% $0.00% $679.70% 41.323.061.81 5.28 4.70 % Revenue 0.80 -$65.42% Gross Profit $1.69% 2.93% 4.47 $102.80 $152.09 30.80% 26.10 $13.05% $0.17 $163.65% 26.45% $678.80% 57.60% $20.63 31.07 10.037.25% $1.20 $10.85% $208.60% $0.53 $470.63 $1.16 $156.624.538.00 $166.36% 15.65 10.92% $16.516.88 $135.75 $125. Inc.58% Acquistions $15.183.66 3.37% $135.50% 31.05 31.00 $29.00 0.34% 6.10 % Y/Y Growth 8.63% Net Working Capital $121.90 % Revenue 13.191.397.24 $595.uoregon.90 -$187.05% $907.042.10 $100.00% $660.10 $818.70% 26.00 $0.45% 58.12% 26.25% $1.95% Operating Profit $384.00 0.00% $508.05% 58.00 0.192.80% 41.00% $455.75% $46.21 $4.70 $1.20% 42.00% $697.36 30.00% 0.93 $275.84 30.00% $443.52% Impairment Charge $0.74 13.43% Total Operating Expenses $806.13% 59.63 $4.359.16% 0.60% $20.00 0.67% 28.41% $1.13 26.30 % Revenue 27.00% 31.82 10.00 $0.191.22% $1.4250% $0.12% 58.00% 31.45% 10.176.80% $160.95 $306.00% 0.00 Tax Rate 26.06% 30.134.80% $1.00 $0.00% $476.68 $1.888.67% 27.15 $121.25% $1. $1.37 0.60 27.00% $462.28% 3.80 $924.85 $619.50% 2.00 0.313.00% $289.00% 26.35% 0.00% $1.80 30.00 $0.4000% $0.70 $18.90 $1.181.70 $860.327.61 $1.20 27.34 $1.21 4.88% 41.313.03% $1.750.15 0.4000% $49.35% $0.67 2.24 $2.00 0.68 3.43% 4.50% $296.21 $1.57% $119.04 $494.80 $525.38% 0.90 $88.75% 2.79 $1.34 7 8 9 10 2017 E 2018 E 2019 E 2020 E $4.33 -$7.30% $181.90 % Revenue 59.86 $2.55% 21.32 2.00% $1.91% 26.43 $179.98% 0.00% $0.00% $311.95% Add Back Interest Expense*(1-Tax Rate) $44.41% 2.90 $943.879.32% $199.10 $174.02 27.60% $715.12% 29.017.00 0.81 $35.54 $3.00 0.60 $56.00% 0.4000% $0.86 $2.90 $376.4250% $0.00% 0.25% 26.007.00% $293.30% 0.71 32.00% 42.45 $553.45% $0.05% Less Taxes (Benefit) $92.07% 0.43% 13.48% 0.73 $0.00 $95.85% 14.84% $0.60 $85.00 % Revenue 0.37 2.68% $19.30 $0.88% 30.760.71% 30.00% 31.84 $4.63 0.25% $0.00% 57.00 1.00 $0.95% $1.21% $3.60 2.10 42.15 $105.00 0.00% $0.20 $1.06% -$0.00 % Revenue 0.13% 42.83% 2.64 $1.00 $0.24 $252.50 $466.38 $975.03% $228.70 3.58 2.95% $0.088.888.50 $85.00 0.090.50 Net Margin 8.07 $564.03 15.81% 4.90 $693.86 $1.03 2.60 $846.42% $1.08% $625.12 $1.22% $1.66 14.46 30.84% $0.00 0.00 0.00 0.336.30 31.05% $907.42 10.87% 15.45 $520.94 % Revenue 1.20% 58.11% $216.58% Operating Expenses SG&A $806.30 $970.65% Pre-tax Income $353.00% $736.15% 15.70 $536.15 $106.85% $6.32% $1.14 $993.

68 $37.82% -9.13 $46.5 50.00% -14.00 -0.15% APPENDIX 4 – BETA SENSITIVITY ANALYSIS Beta 0.8 $6.854.00 -1.76 $4.539865073 0.56 $44.962.8 $46.997.94 $6. Deviation 2.99 $52.54% -22.649730146 0.265 0.72 779.78 $2.85% Firm Value % Debt 11.24 $41.62% Terminal Value Beta 0.00 1.06 -0.89 -25.40 $47.McCormick & Company.142.78% -3.630% Equity Value WACC 6.62% Cash CAPM 6. Inc.50 1.595 0.31 $39.50 0.320134927 0.86% 17 .43 0.210269854 St.50 -1.15% LT Debt Cost of Debt 5.32% Diluted Share Count Implied Price Current Price Under Valued 3% $8.22 134.375 0.18% 14. university of oregon investment group http://uoig.uoregon.edu APPENDIX 3 – DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS Assumptions for Discounted Free Cash Flows Model Tax Rate 31% Terminal Growth Rate Risk-Free Rate 3.218.00 Implied Price Under (Over) Valued $34.484932537 0.59% 4.63 $58.29 $35.50 -2.53% -19.27% 27.00 0.430 PV of Terminal Value Market Risk Premium 7% Sum of PV Free Cash Flows % Equity 88.

98% 38.818.05% 38.86 $1.641.23 $2.95% 61.800.00% 42.90 $1.10 $3.54 $3.63 $2.80 $1.26% 4.00% 3.28% 3.31% 58.00% 3.39% 4.98% $2.586.00% 3.160.94 $2.30% 60.98% 38.46% 39.98% 38.08% 3.71 $1.037.85% 4.44% 5.911.538.02% 61.70% 39.646.96% 4.619.17% 39.60% 3.191.57 $2.91% 60.30% 3.40% 3.02% 61.748.69% 41.850.edu ($ in millions.900.695.70 4.00 $1.38% 18.28% 39.736.10% 3.903.50% 3.23 $4.556.20 $3.university of oregon investment group http://uoig.60 $3.00% 57.80 $1.671.80% 3.80 $3.96 $4.348.00% 3.00% APPENDIX 5 – REVENUE PROJECTIONS 18 .50% 7.80% 3. Inc.414.96% 39.999.474.549.33 11.32% 6.87% 59.36% 8.484.uoregon.916.83% 60.40% 4.854.336.714.30% 57.73 $1.244.70% 4.192.30% 3.716.70% 42.00 $2.910.26% 59.00% 7.50% -3.879.530.325.757.38 $4. 2006A 2007A 2008A 2009A 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E $1.67 $2.93% 0.53 $1.124.80% 7.02% 61.40% 4. except per share data) (in thousands) Consumer Food % Growth % Revenue Industrial Food % Growth % Revenue Total Sales % Growth McCormick & Company.26 $1.68 $2.37 -2.90 $1.70 $1.239.04% 60.92% 3.40 $2.53% 6.990.176.13% 40.21 $4.00% 3.60% 3.00% 3.54% 60.451.342.49% 4.74% 40.31 $2.30% 5.02% $1.72% 60.280.337.43% 4.80% 3.28 $4.02 $1.59 $2.00% 3.80 $1.99 $3.09% 39.30 $1.05 $1.84 $4.06% 4.40 $1.20 $1.65 $4.70 $2.59% 6.90 $1.

10-Q. APPENDIX 6 – SOURCES               MKC 10-K. Conference call Yahoo! Finance Google Finance Reuters Bloomberg SEC.McCormick & Company.uoregon. Inc.gov McCormick website Adam Vinton CNN Money Fox News Business Week Smuckers.com Heinz website FactSet university of oregon investment group http://uoig.edu 19 .

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