Shareholders of The Marzetti Company would probably like to forget the past six months even happened. The stock dropped 35.1% and now trades at $111.34. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in The Marzetti Company, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is The Marzetti Company Not Exciting?
Even though the stock has become cheaper, we’re passing on The Marzetti Company for now. Here are three reasons why there are better opportunities than MZTI, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, The Marzetti Company’s 1.8% annualized revenue growth over the last three years was sluggish. This fell short of our benchmarks.
2. Fewer Distribution Channels Limit Its Ceiling
With $1.92 billion in revenue over the past 12 months, The Marzetti Company is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with retailers.
3. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products, has a stronger brand, and commands pricing power.
The Marzetti Company has bad unit economics for a consumer staples company, giving it less room to reinvest and develop new products. As you can see below, it averaged a 23.5% gross margin over the last two years. That means The Marzetti Company paid its suppliers a lot of money ($76.50 for every $100 in revenue) to run its business.
Final Judgment
The Marzetti Company isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 15.5× forward P/E (or $111.34 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at the Amazon and PayPal of Latin America.
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