This Small Stock Could Become a Blue-Chip "Forever Stock"

Tim Begany's picture

Friday, June 15, 2012 - 8:30am

by Tim Begany

Shareholders in leading blues-chip companies such as General Electric Co. (NYSE: GE), Johnson & Johnson (NYSE: JNJ) and HJ Heinz (NYSE: HNZ) are fortunate. Stocks like these can be great investments. But ideally, investors could have made more money if they had invested in them way before they became established blue chips -- when their potential to be profitable giants was reasonably apparent, yet there was still quite a ways to go on the ride up. 

Those days are long gone for these stocks, of course, but there are smaller firms with lots of potential to evolve into the next GE, JNJ or Heinz.

In fact, I think I may have found the "next" Heinz -- or at least something very close to it.

But first, let's take a minute to appreciate a stock like Heinz. 

Let's face it. Ketchup, condiments, sauces and frozen food are a little boring. Companies like this don't typically get a lot of love. They're not "sexy" social media IPOs like Facebook (NYSE: FB), Groupon (Nasdaq: GRPN) or Zynga (Nasdaq: ZNGA), or even market-movers like ExxonMobil (NYSE: XOM) or Apple (Nasdaq: AAPL).

But one thing's for sure: A "boring" stock like this is a GREAT way to make money...

This is the whole point behind StreetAuthority co-Founder Paul Tracy's "forever stock" idea. His newsletter, Top-10 Stocks, is devoted exclusively to finding "forever stocks" that you can buy, sleep well at night owning, and hold forever, beating the market with outsized gains in the process.

The next Heinz?
There's one stock I like in particular because it makes products individual consumers and the foodservice industry use in large quantities daily -- spices, herbs, extracts, seasonings and other food flavorings. Plus, individuals and businesses would probably be loathe to do without these products even in a much tougher economy than we're seeing now.

Sound familiar?

What's more, there is great potential for this company to become a giant -- perhaps even the next Heinz. And while that may not sound very sexy, all I have to do is point you to that chart above to show you that we're talking serious long-term gains with a stock like that. 

The company I'm talking about is McCormick & Co. (NYSE: MKC).

Even though it's still only a mid-size firm, with a market capitalization of $7.4 billion, it's an industry leader and controls half the North American market for spices and other food flavorings. Yet it could evolve into a full-fledged blue chip as it leverages this competitive advantage to grow market share domestically and overseas, particularly in emerging markets where people are increasingly adopting a Western lifestyle and using packaged food products of all sorts, including seasonings.

Despite its smaller size, McCormick has much in common with many of the best blue chips. For one thing, it's venerable, having been founded in 1889. It has many well-established brands: McCormick spices and extracts, Zatarain's rice dishes, Old Bay seasoning and Thai Kitchen rice, noodles and soups. In addition, it has a history of reliable dividends, rewarding shareholders with a payout for 85 consecutive years and raising the payout in each of the past 27 years. The current dividend of $1.24 a share is good for a yield of 2.2%, not bad at all for a mid-cap stock, and right up there with what a lot of blue chips pay.

The difference -- even though it's more than 120 years old -- is that McCormick is at an important stage where it looks like it could become a bona-fide blue chip, yet there's still a ways to go before it gets there. 

To achieve this, the company is investing in new products with the goal of generating 10-12% of sales by 2015, compared with 8-9% currently. McCormick is also aggressively pursuing opportunities in emerging markets, something I consider essential for a future blue chip. Currently, only 10% of the firm's sales ($3.8 billion a year) are in emerging markets, compared with 50% in North America and 40% in Western Europe. Management says it aims to double emerging markets sales to 20% of total revenue by 2015.

As such, the company has been making new acquisitions in those regions. In September of last year, it paid $268 million for Polish spice maker Kamis SA, for instance. In that same month, it completed a $115 million deal to buy an 85% interest in Indian food maker Kohinoor Foods Ltd., which sells basmati rice and other ready-to-eat foods in India and other countries. Management is also keeping an eye out for more opportunities in emerging markets.

Risks to Consider: McCormick may be a global operator, but it still gets 20% of sales from two customers -- PepsiCo Inc. (NYSE: PEP) and Wal-Mart Stores (NYSE: WMT), which account for about 10% each. Losing either or both of these customers could significantly reduce revenue.

Action to Take --> It could be many years from now, but I like McCormick's chances of becoming a blue chip someday. As the company continues to expand globally, the somewhat heavy reliance on PepsiCo and Wal-Mart for revenue should progressively decline.

My main concern at this point is valuation. McCormick's price-to-earnings (P/E) ratio of 20 looks pretty lofty next to the S&P 500's P/E ratio of 14. McCormick may not grow by leaps and bound to get to blue chip status -- perhaps 25% or so through 2015, but that's good enough for me. This assumes earnings per share rise 9% a year, from $2.79 in 2011 to $3.94 in 2015 as analysts project.

If you multiply the projected earnings for 2015 by the historical P/E ratio of 18, then you get a stock price of about $71 a share (18 x $3.94 = $70.91), which is only 26% more than the current share price. This translates to a return of barely 6% a year -- nothing to write home about. So investors may want to wait for a pullback before investing, but I think this stock has serious long-term potential.

[Note:If the idea of holding a stock for the long haul is something you like, then you’ll want to see our latest presentation: “The 10 Best Stocks to Hold Forever.” This is the set of stocks you can buy today and hold for the rest of your life. This sort of "worry-free" performance is exactly the reason many of the world's richest investors, politicians, and businessmen have owned shares of these stocks for decades, using them to obliterate the market.]

Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of XOM, JNJ in one or more of its “real money” portfolios.