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Recently, we reiterated a Neutral recommendation on New York-based International Flavors & Fragrances Inc. (IFF - Analyst Report), one of the leading creators and manufacturers of fragrance and flavor products.  

Why Neutral?

The recovering global economy, which in turn is boosting consumer spending, is seen as a prime growth catalyst for the flavors and fragrances industry. International Flavors & Fragrances is making every effort to leverage benefits from the rising demand for its products.

Also, the company is undertaking initiatives to improve its profitability through enhancement of manufacturing efficiencies. Year-to-date 2013, International Flavors & Fragrances announced plans to close the Fragrances facility in Indonesia, Flavors plant in Sweden and Augusta, and Georgia based Fragrances Ingredients manufacturing facility.  An exit from these low-margin sales activities is likely to bear fruits for the company, going forward.

Talking of innovations, the company’s recent collaboration with Amyris to develop and commercialize cost-effective Fragrance Ingredients deserves special mention.

Further, International Flavors & Fragrances is strengthening its footholds in emerging markets, which we see as an added advantage for the company. In the first quarter of 2013, the company’s business in the emerging markets grew 9% and represented nearly 50% of total sales versus 47% in year 2012.

We believe that new business wins, geographical diversifications, wide product lines, continuous accomplishments in research and intense consumer insight will be advantageous for the company, going forward. Despite these compelling long-term growth prospects, near-term headwinds surrounding International Flavors & Fragrances force us to remain on the sidelines.

Risks arising from foreign currency translation can prove detrimental to the company’s overseas revenue generation. Also, disruptions in the supply or quality of ingredients or rising prices for ingredients purchased could reduce the company’s profitability. Gross margin in the first quarter 2013 was hit hard by higher input costs while an impact on gross margins to the extent of 400 basis points is expected, going forward.

Others Stocks to Consider

International Flavors & Fragrances currently has a Zacks Rank #3 (Hold). Other stocks to watch out for in the industry are Nu Skin Enterprises Inc. (NUS - Snapshot Report) with a Zacks Rank #1 (Strong Buy) while Avon Products Inc. (AVP - Analyst Report) and Inter Parfums Inc. (IPAR - Snapshot Report), each holds a Zacks Rank #2 (Buy).
 

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