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International Flavors' Growth Potential Solid Despite Risks

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We issued an updated research report on International Flavors & Fragrances Inc. (IFF - Free Report) on Jul 14. Though the company has strong growth prospects in the near and long term, we believe that exposure to headwinds might restrict its growth momentum in the quarters ahead.

Year to date, shares of International Flavors & Fragrances have yielded a return of 12.65%, outperforming the gain of 9.15% recorded by the Zacks categorized Chemicals Specialty industry.

It currently carries a Zacks Rank #3 (Hold). Below we briefly discuss the company’s tailwinds and headwinds.

Growth Drivers  

Geographical & Product Portfolio Diversification: The company’s internationally diversified business structure, with operations primarily in North America, Europe, Africa and the Middle East, Latin America and Greater Asia, have proven advantageous over time. Also, it has a huge product base, including flavor compounds for the food and beverage industries as well as fragrances for the cosmetics industry and household products industry. The company is focused on the development of new and innovative compounds through its exhaustive research and development wing.
Inorganic Growth Strategies: Acquiring meaningful businesses have helped the company expand its product offerings and in turn, its profitability. Among many, buyouts of David Michael & Company in Oct 2016 and Fragrance Resources in Jan 2017 deserve special mention. For 2017, the company anticipates acquired assets, David Michael and Fragrance Resources, to contribute roughly 4.5% to sales growth and 2.5% to both operating profit and earnings per share growth. In April, the company acquired Oregon-based Columbia Phytotechnology LLC (also known as PowderPure). With the addition of PowderPure, the company expects to strengthen its natural platforms and satisfy demand for natural and clean label products. Over 2016–2020, the company anticipates acquired assets to generate approximately $500 million to $1 billion in sales.

Shareholders’ Return and Promising ’17 Guidance & Long-Term Targets: Share buybacks and dividend payments are the prime means of returning value to shareholders. In first-quarter 2017, the company paid cash dividends of $50.7 million to its shareholders while using $37.6 million for the purchase of treasury stocks. Over 2016–2020, the company anticipates cash returned to its shareholders to be within 50–60% of the net income.

For 2017, International Flavors & Fragrances anticipates net sales to grow 7.5−8.5% and earnings per share to increase 6.5−7.5%. Operating profit is likely to grow 5.5−6.5% while earnings per share will increase 6.5−7.5%. 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.

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.

Near-Term Headwinds

Impact of Global Uncertainties: Global uncertainties 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 & Fragrances’ business operations and hence, its profitability.

Woes Related to International Operations: The company’s presence in international markets has exposed it to risks arising from foreign currency-translation and geopolitical issues. For the quarter ended Mar 31, 2017, foreign currency translation produced a negative impact of 1% on revenue growth and 4% on earnings per share. For 2017, the company predicts a negative foreign currency impact of 1.5% on revenues, 2.5% on operating profit growth and 3.0% on earnings per share growth.

Stiff Competition & Others: International Flavors & Fragrances is also 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.

Zacks Rank & Stocks to Consider

International Flavors & Fragrances currently has a $10.5 billion market capitalization. Some better-ranked stocks in the chemical industry include American Vanguard Corporation (AVD - Free Report) , Ashland Global Holdings Inc. (ASH - Free Report) and KMG Chemicals, Inc. . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American Vanguard’s earnings estimates for 2018 have improved over the last 60 days. Also, the company has an average positive earnings surprise of 1.39% for the last four quarters.
Ashland Global Holdings’ earnings estimates for fiscal 2017 and fiscal 2018 have been revised upward over the last 60 days. Also, the company pulled off an average positive earnings surprise of 2.56% for the last four quarters.

KMG Chemicals witnessed upward earnings estimate revisions for fiscal 2017 and fiscal 2018, over the past 60 days. Also, the company delivered an average positive earnings surprise of 12.54% for the last four quarters.

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