Wide-Moat McCormick Getting Back on Track After Mustering Up a Solid Q1, but Shares Heated

In recent quarters, we’ve opined that the rash of challenges plaguing McCormick would prove transitory (supply chain hiccups and COVID-19 restrictions in China), and first-quarter marks (6% organic sales growth, an 80-basis-point downdraft in adjusted gross margins to 36%, and a 40-basis-point shortfall in adjusted operating margins to 14.5%) give credence to our sentiment. This also struck the right note with the market, with shares up 10% on the print, though our fervor is more tempered; we expect to edge up our $62 fair value estimate by a low-single-digit percentage to account for time value. With shares trading 30% above our intrinsic valuation, implying a lofty low-30s times our fiscal 2023 earnings estimate, we think investors should await a more favorable risk/reward opportunity.