It has been about a month since the last earnings report for International Flavors (IFF - Free Report) . Shares have lost about 4.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is International Flavors due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
International Flavors Q2 Earnings Beat, Improve Y/Y
International Flavors & Fragrances reported adjusted earnings of $1.66 per share in second-quarter 2018, which surpassed the Zacks Consensus Estimate of $1.61. Also, the bottom line improved 11% from the year-ago tally of $1.50. On a constant-currency basis, the company’s adjusted earnings increased nearly 8% year over year.
Including one-time items, International Flavors & Fragrances posted earnings per share of $1.25 in the quarter compared with $1.38 reported in the year-ago quarter.
Segmental Performances Drive Net Sales
In the reported quarter, International Flavors & Fragrances’ net sales were $920 million, reflecting year-over-year growth of 9%. On a constant-currency basis, revenues climbed 5% from the prior-year period. Also, the top line surpassed the Zacks Consensus Estimate of $900 million by 2.2%.
Geographically, revenues generated from the North American operations rose 8% year over year, while revenues in Europe, Africa and the Middle East were up 13% or grew 2% on a constant-currency basis. Revenues from Latin American operations increased 6% year over year, while that from Greater Asia increased 8% or improved 5% on a constant-currency basis.
The company operates in two segments — Flavors and Fragrances. The segmental information is briefly discussed below:
Revenues generated from the Flavors segment came in at $451 million, increasing 9% year over year. On a constant-currency basis, revenues grew 6% year over year. It represented 49% of the quarter’s net sales.
The Fragrances segment’s revenues were $470 million, rising 10% year over year. It accounted for 51% of net sales in the quarter under review. On a constant-currency basis, revenues grew 5% year over year.
Margin Profile Mixed
In the quarter under review, International Flavors & Fragrances’ cost of goods sold rose 11% year over year to $522 million. Adjusted gross profit increased 4.3% year over year to $399 million, while the adjusted gross margin came in at 43.4% versus 45.4% witnessed in the year-ago quarter.
Research and development expenses flared up 3% year over year to $74.8 million. Adjusted selling and administrative expenses in the June-end quarter rose 5.7% year over year to $145 million. Adjusted operating profit increased 15.9% year over year to $169.8 million, while adjusted operating margin shrunk 100 basis points to 18.5%.
Balance Sheet and Cash Flow
Exiting the second quarter, International Flavors & Fragrances had cash and cash equivalents of $322 million, down from $368 million at the end of 2017. Long-term debt grew 5% to $1,717 million as of Jun 30, 2018 from $1,632 million as of Dec 31, 2017.
International Flavors & Fragrances generated $55 million of cash from operating activities during the six-month period ended Jun 30, 2018, compared with $58 million reported in the comparable period last year.
Capital invested in purchasing property, plant and equipment totaled $67.4 million during the six-month period ended Jun 30, 2018, increasing 46% from the comparable period last year. Dividend paid totaled $108.8 million, while treasury stocks worth roughly $15.5 million were purchased.
On Aug 1, the company raised its quarterly cash dividend by 6% to 73 cents per share. The dividend will be paid on Oct 5 to shareholders of record as of Sep 24, 2018.
In May 2018, International Flavors & Fragrances signed an agreement to combine its operations with Frutarom Industries Ltd. under which it will acquire the latter’s entire shareholding for a total consideration of $7.1 billion. The combined business will lead all players, who are dealing with scent, natural taste and nutrition, globally. Exposure to small- and mid-sized customers, as well as increasing business scope in new categories, including natural colors, antioxidants, health ingredients and enzymes, will be beneficial for International Flavors & Fragrances.
Regarding the pending merger with Frutarom, International Flavors & Fragrances recently announced that Frutarom’s 94.6% shareholders voted in favor of the merger. The transaction is expected to close in fourth-quarter 2018, subject to customary closing conditions.
For 2018, International Flavors & Fragrances anticipates gaining from its efforts to check costs, strategic investments and expand businesses globally.
The company expects its sales and operating income will 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.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, International Flavors has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, International Flavors has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.