A month has gone by since the last earnings report for International Flavors (IFF - Free Report) . Shares have lost about 7% 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 the most recent earnings report in order to get a better handle on the important catalysts.
International Flavors Q3 Earnings In Line, Sales Beat
International Flavors & Fragrancesreported adjusted earnings of $1.54 per share in third-quarter 2018, which came in line with the Zacks Consensus Estimate. However, the bottom line improved 5% from the year-ago tally of $1.47. On a constant-currency basis, the company’s adjusted earnings increased nearly 12% year over year aided by strong performance at its segments, new wins and pricing actions. These factors mitigated rising raw material costs.
Including one-time items, International Flavors posted earnings per share of $1.17 in the quarter compared with $1.39 reported in the year-ago quarter.
Segmental Performances Drive Net Sales
In the reported quarter, International Flavors’ net sales were $908 million, reflecting year-over-year growth of 4%. Further, the top line surpassed the Zacks Consensus Estimate of $891 million by 2%.
Geographically, revenues generated from Latin American operations increased 12% year over year while North American operations rose 10% year over year. Revenues in Europe, Africa and the Middle East were up 6% while that from Greater Asia increased 4%.
Revenues generated from the Flavors segment came in at $436 million, increasing 6% year over year. On a constant-currency basis, revenues grew 7% year over year. The Fragrances segment’s revenues were $471 million, rising 2% year over year. On a constant-currency basis, revenues grew 2% year over year.
Higher Costs and Expenses Affect Margins
In the quarter under review, International Flavors’ cost of goods sold rose 3% year over year to $507 million. Adjusted gross profit inched up 1% year over year to $391 million. Adjusted gross margin came in at 43.1% compared with 44.2% witnessed in the year-ago quarter.
Research and development expenses flared up 3% year over year to $75.3 million. Adjusted selling and administrative expenses in the quarter ended September rose 2% year over year to $142 million. Adjusted operating profit increased 4% year over year to $164 million, while adjusted operating margin shrunk 10 basis points to 18.1%.
Balance Sheet and Cash Flow
Exiting the third quarter, International Flavors had cash and cash equivalents of $5,274 million, a significant improvement from $368 million cash held at the end of 2017. Long-term debt grew to $4,331 million as of Sep 30, 2018 from $1,632 million as of Dec 31, 2017.
International Flavors generated $202 million of cash from operating activities during the nine-month period ended Sep 30, 2018, compared with $199 million reported in the comparable period last year. Capital invested in purchasing property, plant and equipment totaled $102 million during the nine-month period ended Sep 30, 2018, surging 32% from the comparable period last year. Dividend paid totaled $163 million in the nine-month period ended Sep 30, 2018.
In Oct 2018, International Flavors completed the acquisition of Frutarom Industries Ltd. The combined business will lead all players dealing with scent, natural taste and nutrition, globally. The acquisition will augment segment International Flavors’ exposure to small and mid-sized customers, as well as increasing business scope in new categories, including natural colors, antioxidants, health ingredients and enzymes.
Frutarom is expected to be accretive to International Flavors fourth-quarter 2018 top and bottom-line results. The company provided sales guidance of $3.95 billion-$4.05 billion and earnings per share guidance of $6.25-$6.45 for fiscal 2018.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted 9.78% due to these changes.
At this time, International Flavors has a subpar Growth Score of D, 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 D. 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.