Story Stocks^®

McCormick (MKC) inches higher today following a Bloomberg report that it is in talks to purchase Sauer Brands for as much as $1.0 bln. Sauer Brands is well known for its Duke's Mayonnaise lineup, but it also owns several other brands, including Kernel Season's and The Spice Hunter. While MKC is best known for its seasonings, it also controls a few food-related banners, such as Simply Asia and Thai Kitchen. With a solid lineup of seasonings and food items, MKC and Sauer complement each other nicely, making a possible acquisition of Sauer a decent fit for MKC.

• MKC has been gradually recovering from November bottoms that followed a steady sell-off on Q3 results in early October. The company caters to households and foodservice companies, which has caused some good and bad over the past few quarters. For instance, as at-home food prices eased, food-away-from home prices have struggled to come down as significantly.
• This dichotomy has fueled a rise in at-home consumption, benefitting MKC's Consumer segment while hindering restaurant traffic and hurting MKC's Flavor Solutions segment. With each of these businesses comprising around an equal proportion of MKC's total revenue, its top line has stalled out this year, struggling to break above low-single-digit yr/yr growth.
• However, acquisitions can help provide a decent revenue boost. While it is important not to overpay, if the Sauer Brands acquisition rumor is true, it could benefit MKC's revenue heading into 2025, a year the company expects growth to begin ramping up. MKC outlined its long-term financial expectations in late October. The company anticipates EPS growth of +9-11% and operating income growth of at least +7% over the next three years, with numbers ramping in 2025.

In the absence of acquisitions, MKC tends to return cash to shareholders through repurchases. As such, a relatively expensive purchase of Sauer Brands could temporarily pause stock buybacks as MKC prioritizes paying down debt. However, no representatives for either firm, including Falfurrias Capital Partners, which owns Sauer Brands, have commented on the transaction, making it speculation at this point. Also, despite a possible buyback halt, adding Sauer Brands' lineup to its portfolio would likely be a net benefit for MKC, especially as it heads into its "year of momentum" in 2025.