Smarts mixed with boldness is stuff of McCormick's feat

May 16, 2004|By JAY HANCOCK

IT'S 7 A.M. on a Friday, and McCormick & Co. Inc.'s stock is within hours of hitting another all-time high. Wearing a cinnamon-sage sport coat, a mustard floral-print shirt and no tie, McCormick CEO Robert J. Lawless is explaining to a couple of dozen plant workers the savory feat they have helped accomplish.

"In the years 2000, 2001, 2002," Lawless tells the employees, as he later recalls, "to have a growth company, period, is just stellar performance by everybody."

Indeed it is. The early 2000s were a growth-company graveyard. But McCormick hasn't just grown since 1999. It doubled earnings, doubled its stock price and spouted dividends on top of that.

And it did it as an unglamorous food company, which is like the Miss Universe title going to Mickey Rooney.

"Stellar" doesn't describe it.

Flavor merchant McCormick hasn't been Maryland's highest-flying stock over the past few years; that honor goes to a Glenn Dale company called TVI Corp. whose shares once sold for a nickel and now fetch $3.50.

But it's up there.

Since the end of 1999 the Dow has produced a total return, including dividends, of minus 4 percent. The S&P 500 has lost 20 percent by the same measure; the Nasdaq is down by half.

McCormick produced a total return of 150 percent in that period. Selling pepper and oregano.

"When you look at our performance over the last three or five years -- you pick the metric you want -- it's pretty phenomenal," Lawless said in an interview. "It's the best in the history over that period of time relative to total shareholder return."

No brag. Just fact, as TV gunslinger Will Sonnett used to say.

Wall Street wants -- expects -- more of the same. After the announcement of record sales and profit for the first quarter, McCormick's stock hit an all-time high of $34.84 this month and sells for 24 times earnings. That's more expensive than the Standard & Poor's 500 index, which welcomed McCormick as a member last year.

Heck, it's more expensive than Microsoft, and Microsoft is a software monopoly.

But McCormick is more than a pepper and oregano emporium these days. Under Lawless the company has cultivated its own high technology, doubling annual research and development spending to $30 million.

Investors have long regarded the food industry as low-growth, low-margin and hyper-competitive. But McCormick, founded in Baltimore in 1889 and now based in Hunt Valley, has become a top "flavoring" vendor to other companies fighting for stomach share as well as consumers seeking fresh savor and tang to enliven low-fat and low-carb meals.

McCormick's customers include home cooks, restaurants such as McDonald's and TGI Friday's and food manufacturers such as PepsiCo, Kraft, Campbell Soup and Frito-Lay. And the products aren't just dried leaves and plant extracts anymore; they're complex, compound-ingredient flavorings that bring much higher profits.

How much? McCormick's gross margin -- revenue minus products' direct cost -- soared to 39.6 percent last year from 35.7 percent in 1999. That's one way earnings popped while sales grew by only 13 percent. That's one way (squeezing inefficiencies out of inventory and distribution was another) net profit grew even while research and ad costs soared. And that's how McCormick creamed the S&P Food Products Index and became the No. 1 performing food company the past three years.

Along with T. Rowe Price, Legg Mason, Black & Decker and Mercantile Bankshares, McCormick is one of the few significant, locally based companies from Baltimore's past to have made it to Baltimore's present.

It has 2,845 Maryland employees and emits payroll, charity and procurement checks appropriate to a corporate headquarters with over $2 billion in sales. Lawless, who's 57 and says he intends to remain in the saddle awhile, says he wants to keep McCormick local.

Nobody's approached the company recently about a merger, he says. Perhaps that's because potential acquirers know they'd be fended off.

"We want to stay independent," Lawless says. "We really like this independence part."

Why?

"It's all about the legacy of a CEO. I feel it's very important personally," he says. "And the best way to stay independent is to perform like we have over the past six years."

More than a few people wish him success in that pursuit.

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