Consumer

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Spice maker McCormick & Co., the self-described leader in flavor, just kicked it up a notch. 

The $13 billion company's first-quarter results Tuesday were (let's go ahead and say it) peppered with good news, which we know isn't so common for many of the leading food manufacturers these days. McCormick's sales rose 7 percent,  earnings increased almost as much, and it raised a profit projection for the year. The stock, which had already risen 28 percent in the past 12 months, eclipsing most of its peers, climbed further Tuesday to a new record. 

More Flavor
McCormick is among the best-performing food stocks in the S&P 500 this year.
Source: Bloomberg

While most packaged-food companies are struggling to deliver on current trends around healthy, organic and convenient eats, McCormick CEO Lawrence Kurzius is at the helm of one business that doesn't have this problem. He took over in February and previously ran Zatarain's, the maker of rice sides that McCormick purchased in 2003. 

Bigger Plate
The herbs and spices market is highly fragmented, so McCormick's share is still only 21 percent as the global leader, according to Bloomberg Intelligence. That means it has plenty of room to expand via deals.
Source: Bloomberg

Two main factors appear to be working in McCormick's favor: The current health fad and acquisitions. Deals -- including Brand Aromatics, a tiny New Jersey supplier of flavorings and marinades that was tucked into McCormick's industrial division a year ago -- have tended to be small but still advantageous. 

Things haven't all gone according to plan on the deal front. In McCormick's latest (and largest) endeavor, the company recently proposed a $700 million bid for U.K.-based Premier Foods and has so far been turned down. The fact that Premier Foods snubbed a 90 percent takeover premium demonstrates the increasing power smaller food businesses have in deal negotiations as the big buyers become more desperate for growth.

It's a challenge for McCormick, and given British takeover rules, Kurzius can't say much about the Premier Foods situation right now. But JPMorgan's Max Lewis did grill management about it on Tuesday's earnings call, especially the financial impact of such a transaction. McCormick basically left it at this: Premier Foods would be a great addition to the company, but there are also other targets it's scoping out. At the same time, if Premier Foods is smart, it will entertain talks with McCormick and any other suitors this may drum up. Buyers willing to pay double your stock price don't tend to come along very often. Paulson & Co., a big Premier Foods shareholder -- not to mention, one of the hedge funds taking a hit from the Valeant Pharmaceuticals debacle -- has put pressure on the company to engage McCormick.  

While JPMorgan and another research firm have "sell" ratings on McCormick, investors hardly seem concerned. (After all, this is a company that in the past has been grouped  among the kinds of businesses Warren Buffett's Berkshire Hathaway might want to buy.) Even if the Premier Foods deal doesn't pan out, it can be argued that health-conscious eating pairs nicely with McCormick's ingredients -- they're "associated with cooking from scratch rather than pre-packaged meals," as Bernstein's Alexia Howard puts it. The top-ranking McCormick analyst according to Bloomberg, Howard recommends buying the shares and has a $100 price target. The stock was at about $99 midday Tuesday, and analysts' average forecast is around $86. 

Spicing It Up
McCormick's stock has risen sharply this month amid its bid for Premier Foods and strong first quarter.
Source: Bloomberg

As the industry grapples with how to adapt to the changing food trends and the rising takeover valuations they're causing, McCormick seems to already be in a decent position. It's up to Kurzius to keep up the momentum on both fronts.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Excluding the impact of foreign currency

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net