McCormick has been treading water for the past six months, recording a small loss of 2.4% while holding steady at $81.79.

Is now the time to buy McCormick, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

We're cautious about McCormick. Here are three reasons why we avoid MKC and a stock we'd rather own.

Why Is McCormick Not Exciting?

The classic red Heinz ketchup bottle’s competitor, McCormick (NYSE:MKC) sells food-flavoring products like condiments, spices, and seasoning mixes.

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 generally risen over the last two years but lagged behind the broader sector. On average, the company’s organic sales have grown by 3.4% year on year.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect McCormick’s revenue to rise by 1.4%, close to its 2.1% annualized growth for the past three years. This projection doesn't excite us and suggests its newer products will not accelerate its top-line performance yet.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, McCormick’s margin dropped by 5 percentage points over the last year. If its declines continue, it could signal higher capital intensity and investment needs. McCormick’s free cash flow margin for the trailing 12 months was 9.6%.

Final Judgment

McCormick isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 26.4× forward price-to-earnings (or $81.79 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at our favorite semiconductor picks and shovels play.

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