With a price-to-earnings (or "P/E") ratio of 28.4x McCormick & Company, Incorporated (NYSE:MKC) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
McCormick has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for McCormick
NYSE:MKC Price to Earnings Ratio vs Industry January 1st 2024
If you'd like to see what analysts are forecasting going forward, you should check out our free report on McCormick.
How Is McCormick's Growth Trending?
McCormick's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 6.9%. This means it has also seen a slide in earnings over the longer-term as EPS is down 16% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 13% per annum over the next three years. That's shaping up to be similar to the 13% per year growth forecast for the broader market.
With this information, we find it interesting that McCormick is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.
The Bottom Line On McCormick's P/E
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that McCormick currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
We don't want to rain on the parade too much, but we did also find 1 warning sign for McCormick that you need to be mindful of.
You might be able to find a better investment than McCormick. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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