McCormick Earnings: Q1 Gains Eclipsed by Massive Unilever Deal

Key Morningstar Metrics for McCormick & Company

• Fair Value Estimate
  : $65.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of McCormick & Company’s Earnings

McCormick’s MKC first-quarter organic sales growth of 1% and adjusted gross margin gain to 38.6% were overshadowed by the $44.8 billion tie-up with Unilever’s food arm, equating to 14 times 2025 EBITDA. The deal is set to close in mid-2027. McCormick shares are down mid-single digits.

Why it matters: Despite the combination’s strategic merits (enhanced scale and distribution reach in condiments and cooking aids through Knorr and Hellmann’s), we think this may be a ploy to incite growth in an industry where gains have stagnated.

• Adding Unilever’s high-margin brands (with gross margins in the mid- to high 40s and operating margins in the low 20s) more than doubles McCormick’s current sales base, and the combined firm is poised to generate more than $20 billion in annual revenue. As such, integration risk is high.
• After the close, Unilever and its shareholders will own 10% and 55% of shares outstanding, respectively. We think Unilever’s ongoing stake should align incentives for a successful combination.

The bottom line: We cut our fair value estimate for wide-moat McCormick to $65 per share from $68 to reflect a higher discount rate. We also raise our Morningstar Uncertainty Rating to High from Medium.

• We estimate the $600 million cost-saving target equates to 4% of the combined firm’s cost of goods sold and operating expenses, anchored in efficiencies around procurement, manufacturing, and back-office functions. However, we expect a portion will be directed to brand investment.
• Even before integration concerns, McCormick traded at a discount to our valuation. We’ve held that the market’s negative sentiment likely reflects ingredient and tariff cost pressures against a weak consumer spending backdrop.

Key stats: The deal will include $29.1 billion in share issuance and a $15.7 billion cash payment, taking leverage north of 4 times. We think debt repayment will be prioritized until leverage approaches 3 times, which we expect within three to five years.