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Here's Why You Should Hold on to International Flavors (IFF)

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We issued an updated research report on International Flavors & Fragrances Inc. (IFF - Free Report) on Sep 15. A diversified product portfolio, large customer base, potential benefits from strategic initiatives and synergistic benefits from acquisitions will prove advantageous for the company. However, headwinds related to international operations and industry competition might restrict its growth momentum in the near term.

It currently carries a Zacks Rank #3 (Hold).

In the last three months, shares of International Flavors have yielded a return of 6.8%, outperforming roughly 0.7% decline of the industry.



However, on a P/E (TTM) basis, International Flavors & Fragrances looks overvalued compared to the industry with respective tallies of 25.8x and 23.7x in the last three-month period. Also, the stock is trading at a higher multiple compared with the median of last three- month P/E multiple of 24.2x. This makes us cautious on the stock.

Below we discuss why investors should now hold International Flavors’ stock.

Growth Drivers

Diversification Benefits: We believe International Flavors is poised to benefit from its vast customer base in the food and beverage industries. It is also likely to gain from rising demand from manufacturers of perfume and toiletry, soaps, detergents, fabric care, household cleaners and air fresheners. Its product portfolio includes flavor compounds, fine fragrances, consumer fragrances and fragrance ingredients. Through its research and development wing, the company focuses on the development of new and innovative compounds.

Furthermore, international diversity has played a major role in International Flavors’ profitability over time. Notably, in second-quarter 2017, the company’s sales from North American operations grew 19% year over year while that from Europe, Africa and the Middle East were up 6%. Revenues from Latin American operations grew 3% year over year. The company is working hard to strengthen its foothold in emerging nations, as growing economy in these countries will boost demand for consumer products and in turn, demand for flavors and fragrances used in them.

Inorganic and Other Strategic Initiatives: International Flavors remains keen on making meaningful acquisitions to expand its foothold in unexplored markets and enhance its product offerings. Notably, the company acquired David Michael & Company in October 2016, Fragrance Resources in January 2017 and PowderPure in April 2017. David Michael buyout is in sync with the company’s Vision 2020 business strategy and will boost its customer base in the fast-growing middle-markets and generate incremental revenues of $85 million in 2017. Fragrance Resources are anticipated to generate incremental revenues of $75 million in 2017 and modestly boost earnings in the year. In second-quarter 2017, these buyouts contributed 6% to the company’s sales growth.

In the quarters ahead, the company anticipates gaining from its multi-year productivity program, enabling it to check on costs, make strategic investments and expand businesses globally. It intends to reduce its workforce by 5% globally. By 2019-end, the company anticipates this productivity program to yield annualized savings in the range of $40-$45 million. Also, the company’s newly launched fragrance ingredient — Veraspice — as well as the formation of Tastepoint, a new company to serve middle-market customers will boost growth opportunities.

Promising 2017 Guidance, Long-Term Targets and Shareholder-Friendly Policy: For 2017, International Flavors anticipates net sales to grow 7.5-8.5% on a currency neutral basis while predicts earnings per share to increase 6.5-7.5%. Operating profit is likely to grow 5.5-6.5%.

Over 2016-2020 timeframe, the company hopes to achieve around 4-6% expansion in local currency sales, about 7-9% operating profit growth and over 10% rise in earnings per share. It also anticipates returning 50-60% of the net income to its shareholders.

Share buybacks and dividend payments are the prime means of returning value to shareholders for International Flavors. In first-half 2017, the company paid cash dividends of $101.2 million while using $53.2 million for repurchasing treasury stocks. In August, it raised its quarterly dividend rate by 8%.

Headwinds Restricting International Flavors’ Growth Prospects

Diversification Woes: We believe International Flavors’ geographical expansion has exposed it to risks arising from foreign currency movements and geopolitical issues. Notably, foreign currency translation produced a negative impact of 2% on revenue growth and 6% on earnings per share in second-quarter 2017. Also, this headwind is predicted to negatively impact revenue by 1%, operating profit by 1.5% and earnings per share by 2.5%.

Relation to Global Uncertainties: Difficult macro conditions might reduce or alter consumer spending which may cause a change in customer order pattern, even cancellations. Any such adverse happenings might influence International Flavors’ business operations and hence, its profitability.

Stiff Competition & Others: International Flavors is exposed to risks arising from stiff industry rivalry and volatilities in input price & supply. We believe increased competition from the existing or future rivals, combined with aggressive price competition, might force the company to reduce prices or increase spending, which would negatively impact its sales and profits.

Stocks to Consider

International Flavors & Fragrances currently has $11.4 billion market capitalization. We believe that the above-mentioned positives and negatives clearly justify the stock’s current Zacks Rank #3.

Some better-ranked stocks in the industry are Kraton Corporation , Ferro Corporation and AdvanSix Inc. (ASIX - Free Report) . While Kraton Corporation sports a Zacks Rank #1 (Strong Buy), both Ferro Corporation and AdvanSix carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kraton Corporation’s earnings estimates for 2017 and 2018 improved over the last 60 days. Also, the company pulled off an average positive earnings surprise of 16.54% for the last four quarters.

Ferro Corporations’ earnings estimates for 2017 and 2018 improved over the last 60 days. Also, the company delivered an average positive earnings surprise of 16.17% for the last four quarters.

AdvanSix’s earnings estimates for 2017 and 2018 were revised upward in the last 60 days. Also, the company delivered better-than-expected results in second-quarter 2017, with an earnings beat of 25.76%.

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