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We currently maintained a Neutral recommendation on New York-based International Flavors & Fragrances Inc. (IFF - Analyst Report). Long-term growth prospects are compelling for the company, though near-term risks raise our concern.

Why Neutral?

International Flavors & Fragrances Inc. is one of the leading creators and manufacturers of fragrance and flavor products operating primarily in the United States and internationally. The company currently has a market capitalization of roughly $6.0 billion. Over time, the company has grown through new business wins, wide product lines, continuous accomplishments in research and intense consumer insight.

Moreover, slowly recovering global economy is likely to spur consumer spending which we believe will be a prime growth catalyst for the flavors and fragrances industry. Furthermore, exposure to emerging markets is an added advantage for International Flavors & Fragrances. In 2012, revenue derived from the emerging markets reached 47% of total revenue on the back of an 8% growth in business.

Efforts are being made to earn a greater share of customers’ business across multiple categories in both emerging and developing regions. A new state-of-the-art liquid flavors and fragrances manufacturing unit has been opened in Singapore, a creative facility of Flavors has come up in India and about $50 million invested in Turkey for the expansion of a Flavors’ facility. The construction of another Flavors facility is expected to be complete by the first half 2013 in China.

Over the long term, the company hopes to achieve around 4%-6% expansion in local currency sales, attain about 7%-9% operating profit growth and over 10% earnings per share growth.

It is the near-term concerns that keep us on the sidelines and force us to maintain a neutral stance on the stock. Lower-than-expected results in the fourth quarter along with a sequential plunge in earnings and negative impacts from foreign currency translation impaired our view on the stock. Cost pressure though likely to abate, is still expected to vary from flat to a slight increase in 2013.

We are skeptical about the financial health of the company. For fiscal 2013 and 2014, we have an Earnings ESP (Read: Zacks Earnings ESP: A Better Method) of -0.9% and -2.5%, respectively.

Others Stocks to Consider

Other stocks to watch out for in the industry are Inter Parfums Inc. (IPAR - Snapshot Report) with a Zacks Rank #1 (Strong Buy) while Nu Skin Enterprises Inc. (NUS - Snapshot Report) and Helen of Troy Limited (HELE - Snapshot Report), each has a Zacks Rank #2 (Buy).
 

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