Very few companies went completely unscathed by the global economic downturn brought about by the credit crisis, but this firm was one of them. In fact, sales and earnings have steadily increased for the past decade.
This recession-resistant quality has to do with the stable, predictable nature of products it first started selling in 1889 as well as a customer base that consists of the nearly every aspect of the food industry across the globe. It may sound mundane, but the company boasts of a passion for flavor and has demonstrated a laser-like focus in delivering on this business foundation for many years now.
The firm manufactures and distributes spices, seasonings, flavorings and related specialty foods. Brands include McCormick, Zatarain's, Old Bay, and Lawry's, the last of which was acquired from global consumer goods titan Unilever (NYSE: UL) and brought an archrival in house to further consolidate the industry into company hands. The purchase greatly increases the firm's clout and is the largest acquisition in its history.
The company is McCormick & Company (NYSE: MKC), fittingly the name of one its leading brands. McCormick has built a durable competitive advantage, is the largest industry player, controls its own product manufacturing and distribution and spends heavily on research and development.
McCormick relies on a combination of organic growth of existing brands, acquisitions, and the release of new and innovative products to keep the top line moving steadily forward. Tight cost controls and savvy working capital management, as evidenced by a steadily declining cash conversion cycle, have allowed annual single-digit sales growth during the past 10 years to be leveraged into double-digit earnings improvements each year.
Free cash flow growth has been more erratic, but it grew by more than +40% during the past two years, which is incredible considering the uphill macroec onomic environment McCormick has had to operate in. The industrial segment, which sells to food manufacturers, foodservice firms, and leading multinational restaurants, has experienced the most challenges as consumers tightened their belts and ate out less. On the flip side, this has obviously benefited the consumer segment that sells directly to individuals via grocery stores and other retail outlets. McCormick has quickly boosted marketing dollars to catch this current trend and is also utilizing targeted coupons to cater to the eat-at-home market segment.
McCormick benefits from customer diversity — 38% of sales stem from outside the United States, leaving plenty of potential to expand in faster growing emerging markets. A joint venture in Mexico allowed sales to expand nearly +20% in the region last year, and new products are being introduced to at-home cooks in France.
Excess cash flow has left room for acquisitions and allowed the company to recently incr ease its dividend for a yield of 2.6% and pay down debt taken on to acquire Lawry's during the most recent quarter. Total debt, at under 40% of total capital, is very manageable. Returns on invested capital have averaged 13% in recent years, well above industry and total stock market averages of 2% and 6%, respectively.