shares McCormick (NYSE: MKC) shares have fallen significantly S&P 500: In 2021, McCormick only gained 1% last year, while the S&P 500 rose by 26.9%. This raises a question. Does this recent underperformance force the stock to buy or should investors wait for a correction?

Let’s look at the three reasons why this manufacturer’s stock of spices, condiments, spices, and other fragrances can be bought և one reason that might make it sell.

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1. McCormick boasts a solid operating foundation

McCormick had an impressive third quarter (ending August 31) on behalf of its shareholders, topping analysts’ forecasts for net sales և GAAP (adjusted) diluted earnings per share (EPS). The company’s fourth quarter report is published on January 27.

The company reported $ 1.55 billion in revenue in the third quarter, up 8.3% from a year earlier. McCormick had the lowest quarterly average of analysts at $ 1.54 billion. So how did the company deliver better-than-expected revenue in the quarter?

McCormick received four of those percentage points, or half of its quarterly sales growth, from Cholula Hot Sauce from FONA International, acquired in November 2020 and December respectively. McCormick’s three percentage points of revenue growth was due. Favorable currency translations as the company sells its products in many international markets. Finally, consumer sales contributed to McCormick’s remaining percentage of sales growth. This is due to the fact that more consumers cook at home during the COVID-19 epidemic, preferring the company’s products to its competitors.

With the United States currently experiencing its highest inflation rate in nearly 40 years, McCormick’s gross profit margin has fallen by 260 basis points from a year ago. This was partially offset by the company’s cost savings plan, which explains how McCormick was still able to increase its non-GAAP 5.3% diluted annual EPS to $ 0.80 in the third quarter. This easily exceeded analysts’ expectations – $ 0.72 with non-GAAP diluted EPS for the quarter.

Given McCormick’s strong third quarter, the company expects its net sales to grow 12.5% ​​at its midpoint during the current fiscal year. To achieve this growth, it will rely on the above-mentioned achievements, the release of new products բարձր raising prices. Moving to the end, McCormick expects a 7% increase in non-GAAP diluted EPS to the mid-year high of $ 3.

This is in line with the 7% annual profit growth that analysts forecast for the next five years, which McCormick’s guide for the year seems reasonable.

2. McCormick’s business is financially sound

McCormick is steadily increasing its sales and revenue. But does the company have a strong financial position?

McCormick’s interest rate coverage for the first nine months of this fiscal year was 7.3 ($ 751 million in interest-bearing taxes / $ 103 million in interest expenses). This is slightly higher than the previous interest rate coverage ratio of 7.1 ($ 737 million EBIT / $ 103 million interest expense). In that context, McCormick’s EBIT would have to fall more than 85% before it could cover its interest expense on revenue. This signals that the company is in good financial condition and is not in immediate danger of leaving the business.

3. McCormick has a dividend to grow

McCormick is fundamentally strong. However, it is also important to consider whether it is safe to pay.

McCormick has paid $ 1.36 a share in the last 12 months. Contrary to the guideline of $ 3 in the average point of non-GAAP diluted EPS for the financial year, this is a dividend payout ratio of about 45%. This gives the company the flexibility to build its dividend aristocracy reputation with 35 consecutive annual payouts.

And given its medium-term revenue growth potential of 7% in the medium term, McCormick should continue to provide growth, as has its recent 8.8% growth. Combining the potential for growth of these dividends with a yield of 1.5% is an attractive offer.

Reason to sell (or at least not to buy right now). The rating is extremely rich

McCormick is a stock that I think all investor growth investors should want to have in the long run. However, the only reason I’re interested in buying stocks is because of its controversial delayed valuation.

McCormick traded at 31.3 P / E at $ 98 a share, which is almost double the average of the packaged food industry at 17.6. And analysts forecast McCormick 7% annual revenue growth only slightly higher than the industry average of 6.5%.

The quality of McCormick certainly guarantees a premium for its industry partners, but the current premium, in my opinion, is too much. That’s why I plan to buy McCormick next time I fix it instead of doing it right now.

This article presents the opinion of a writer who may disagree with the position of the “official” recommendations of Motley Fool Premium Consulting. We are motley! Questioning an investment thesis, even our own, helps all of us think critically about investing, making decisions that help us become smarter, happier, and richer.