We suggested coming back into McCormick & Company, Incorporated (NYSE:MKC) in October 2023, catching the bottom in shares, and reiterated that call in March 2024 as the company was "crawling its way back to growth." Make no mistake, shares had long been a reliable investment, but started facing pressure in 2022. Shares have struggled to really get going since then, but there has been a bit of a run-up from the low where we suggested coming back into the stock.

While the recent tail higher is encouraging, it does pale in comparison with much of the market's gains. Still, we like an allocation here, as demand for its seasoning and spice lines from both the consumer and commercial sources remains strong. While sales growth had stalled recently as rampant inflation and economic slowdowns more broadly weighed, earnings continue to expand, and this year it appears that earnings will be expanding nicely from 2023. We still view MKC as a long-term buy and believe sales trends are bottoming out. We will discuss the just-reported performance in Q2 and the outlook going forward.

McCormick Fiscal Q2 sales

McCormick reported 1.2% sales declines versus the year-ago period, with relatively minimal currency impact once again. The sales growth was a result of pricing power. The year-over-year comp also reflects volume growth in consumer offerings, offset by some volume declines in the commercial Flavor Solutions segment. Total revenue was $1.64 billion, a slight $10 million beat versus estimates. It is also important to note that this decline includes the impact of the company's strategic decision to divest a small canning business. Consumer sales were down 1% overall, driven by 1% pricing declines (a good sign for inflation) but also higher volume.

What about regionally? Well, consumer sales in the Americas were down 2% from Q2 2023. Pricing action was down 1%, but volume and mix were comparable to the year-ago period. The volume growth in its spices and seasonings offerings was offset by volume declines in prepared food categories.

Over in Europe, Middle East, and Africa, sales were up a strong 5% from a year ago. Controlling for currency, sales were up 4%, stemming from a 4% increase in volume.

However, sales in the Asia-Pacific region dropped 5%, continuing a run of declines in that region. However, controlling for currency, sales were down 1%. There was a 2% volume decline, while pricing offset this 1%. Much of the weakness stems from China, which is still emerging from a slowdown. Outside of China, however, management noted that "sales growth was strong."

The more commercial focused Flavor Solutions segment saw sales decline 1%, with minimal impact from currency. There was a 1% increase from pricing actions but a 2% decrease in volume and mix, but the segment also took a small sales hit due to the aforementioned business divestitures.

In the Americas, sales here were about flat compared to last year, with a 1% increase in pricing and a 2% volume decline. Notably, there was softness is some quick service restaurant orders, which implies that there has been a bit of a slowdown in restaurants, corroborating what we have heard CEOs discussing on recent restaurant earnings calls.

Over in EMEA, sales were down 7%, or 8% controlling for currency. There was a 4% decline in volume, also with lower orders from restaurants. Now while the consumer segment declined in Asia-Pacific, Flavor Solution sales were up 6% in Asia, or up 10% on a constant dollar basis. This was driven by new products and customer promotions.

McCormick Q2 gross profit and earnings

The company has been raising prices, as well as undergoing a long cost savings initiative. This has paid off on margins in recent quarters as well as earnings power, despite the stalling sales. McCormick has been ramping up its profit again. Margins jumped 60 basis points versus the year-ago period. Selling, general, and administrative expenses increased slightly from the year-ago period, driven by increases in marketing, but this did not weigh down operating income.

Operating income increased to $234 million from $222 million a year ago. Overall, in Q2, EPS came in at $0.69 per share, rising from $0.60 in the year-ago quarter. This is very positive, and with the pressure on shares in the last two years we have seen the valuation here improve tremendously. Coupled with the earnings growth, we continue to like some exposure here for diversification and future opportunity.

Valuation

For the year 2024, we think EPS hits $2.80 depending, while the guide is for $2.76 to $2.81. So, although we are still seeing pressure here, China is slowly coming back on, and we think the Asia-Pacific region performs better than expected. We saw that in Flavor Solutions this quarter. That said, at this EPS expectation, that puts valuation at nearly 25X FWD EPS at $71 per share. The stock has always historically had a stretched valuation, but usually the valuation is in the high 30X earnings range. Historically, this is still very attractive for how this stock tends to trade. The price to sales of 2.8X is reasonable here, though compared to other consumer staple-type companies, an 18X EV/EBITDA is still pricey, but this is 17% cheaper than the 5-year historical average for the stock.

Looking ahead

The signs of slowdowns from restaurants raise some concern, but there is also ample room for global expansion with McCormick & Company, Incorporated. Further, McCormick has made difficult decisions to divest businesses, and control spending. It has raised prices. Volumes have held up all things considered, but overall sales are roughly expected to be flat for the leaner business here in 2024. However, margin improvements mean EPS is back to growth. If we get marginally better than expected performance, we could see some $0.25 to $0.30 growth in annual EPS growth, or 10 to 12%.

While it is a long road ahead, we think there is long-term upside for McCormick & Company, Incorporated shares. Consider shares for some diversification into the foods and staples.