Over the past six months, McCormick’s shares (currently trading at $64.80) have posted a disappointing 19.3% loss, well below the S&P 500’s 16.2% gain. This might have investors contemplating their next move.
Is there a buying opportunity in McCormick, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is McCormick Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons you should be careful with MKC and a stock we'd rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.
The demand for McCormick’s products has been stable over the last eight quarters but fell behind the broader sector. On average, the company has posted feeble year-on-year organic revenue growth of 1.8%. 
2. EPS Barely Growing
Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
McCormick’s unimpressive 2% annual EPS growth over the last three years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, McCormick’s margin dropped by 4.8 percentage points over the last year. If its declines continue, it could signal increasing investment needs and capital intensity. McCormick’s free cash flow margin for the trailing 12 months was 8.2%.
Final Judgment
McCormick isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 20.5× forward P/E (or $64.80 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of our all-time favorite software stocks.
Stocks We Like More Than McCormick
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