On Sep 14, we issued an updated research report on International Flavors & Fragrances Inc. (IFF Quick QuoteIFF - Free Report) . Notably, the company is well poised to benefit from cost cutting efforts, productivity initiatives, acquisitions and surging demand in global market for flavors and fragrances (particularly in emerging markets). However, input cost inflation along with high debt levels remain concerns.

 

 

The company expects sales and operating income to grow 4-7% and 6.5-8.5%, respectively, in 2018. On a currency-neutral basis, sales growth is projected at 3-5% and operating income improvement is estimated to be 5-7%. Earnings per share are likely to be up 5.5-7.5% or 4-6% on a constant-currency basis. Focus to drive greater efficiencies through costs and productivity initiatives as well as favorable taxes continue to support overall profitability for the company.

 

 

The global market for flavors and fragrances continues to grow, spurred by increasing demand for a variety of consumer products containing flavors and fragrances. The market which was around $24.8 billion in 2017 is projected to grow approximately 2-3% by 2021, primarily driven by anticipated growth in emerging markets. Growing economy in these countries is bolstering demand for consumer products, and in turn fueling requirement for flavors and fragrances used in them.

 

The company will be able to capitalize on the expansion in flavors and fragrances markets and deliver long-term growth on the back of its global presence, diversified business platform, broad product portfolio, along with global and regional customer base.

 

 

The company's concerted efforts to bring innovation by a dedicated research and development wing will be a catalyst. Notably, the company's introduction of Veraspice — a fragrance ingredient; Re-Imagine — programs that enable the company to pursue unaddressed opportunities in the food and beverage industry as well as assist it in innovation initiatives; and Tastepoint — a new company formed to serve middle-market customers are worth mentioning here.

 

Further, the company has been working on its multi-year productivity program, which is anticipated to yield annualized savings of $40-$45 million by the end of 2019.

 

 

Over time, the company has reinforced its product portfolio and leveraged business opportunities through the addition of assets. The buyouts of David Michael & Company in October 2016, Fragrance Resources in January 2017 and PowderPure in April 2017 are worth mentioning in this regard.

 

In May 2018, the company signed an agreement to combine its operations with Frutarom. International Flavors & Fragrances anticipates concluding the deal in the fourth quarter. Together, International Flavors & Fragrances and Frutarom will create a global leader in natural taste, scent and nutrition with an expected 2018 pro forma sales of $5.3 billion. It will also have a broader customer base, more diversified product offerings and an increased market penetration.

 

For 2016-2020 timeframe, the company anticipates acquisitions to generate approximately $500 million to $1 billion in revenues.

 

 

International Flavors & Fragrances is dealing with adverse impacts of rising costs and operating expenses. Notably, the company's cost of sales in the last five years (2013-2017) grew at 2.8% (CAGR) while operating expenses (including adjusted selling, general and administrative as well as research and development expenses) went up 2.4%.

 

In 2018, higher costs of raw materials across a range of categories (including turpentine, citrus and petro-derived products) will continue to impact margins. Unwarranted rise in costs and expenses is likely to prove detrimental to its margins and profitability.

 

In 2017, a fire at the manufacturing facility of BASF Group ("BASF"), one of the company’s suppliers, caused them to declare a force majeure and resulted in a disruption of the availability of certain ingredients used in some of the fragrance and flavor compounds. This BASF supply chain disruption issue impacted the margins of the Fragrances segment in the first half of 2018, which is likely to persist in the second half of 2018 as well. Moreover, increased environmental actions on suppliers in China are likely to impact International Flavors & Fragrances’ operations.

 

 

In the last five years (2013-2017), the company's long-term debt has surged at a CAGR of 11.8%. The company's total debt/total equity was 97.8% at the end of second-quarter 2018. High-debt levels can inflate the company's financial obligations and put pressure on margins.

 

 

In the last year, International Flavors & Fragrances' shares have declined 5.3%, against growth of 4.7% recorded by the industry.

 

International Flavors & Fragrances currently carries a Zacks Rank #3 (Hold).

 

 

Some better-ranked stocks in the same sector include Celanese Corporation (CE Quick QuoteCE - Free Report) , Trinseo S.A. (TSE Quick QuoteTSE - Free Report) and Ingevity Corporation (NGVT Quick QuoteNGVT - Free Report) . All three stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

 

Celanese has a long-term earnings growth rate of 10%. The stock has gained around 11% in a year’s time.

 

Trinseo S.A. has a long-term earnings growth rate of 12%. The company’s shares have been up 10% during the past year.

 

Ingevity has a long-term earnings growth rate of 12%. Its shares have appreciated 74% in the past year.

 

 

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