International Flavors & Fragrances Inc.
(IFF - Free Report
) has been disappointing investors, of late. Shares of this manufacturer of fragrance and flavor products dipped 11% over the past year compared with the industry
’s decline of 9.9%. The company has been grappling with input cost inflation, disruptions in the supply chain owing to issues across its ingredients suppliers, and huge debt levels.
Estimates Moving South
The company’s earnings estimates for fourth-quarter 2018, full-year 2018 and 2019 moved south over the past 60 days, reflecting bearish analyst sentiment. For the fourth quarter, the estimate moved down 7% to $1.29 per share in the past 60 days. For fiscal 2018, the estimate has dropped 1% to $6.23. For 2019, the estimate has declined 11% to $5.46 per share.
International Flavors & Fragrance’ trailing 12-month price earnings (P/E) ratio is 21.8, while the industry's average trailing 12-month P/E ratio is lower at 17.9. This implies that the stock is overvalued.
Near-Term Headwinds Remain
Over time, the company has been grappling with the adverse impacts of rising costs and expenses. In the last five years (2013-2017), the company’s cost of sales has witnessed a compound annual growth rate (CAGR) of 3.6% while adjusted selling, general and administrative and research and development expenses together have increased at a CAGR of 3.0%. Higher costs of raw materials across a range of categories (including turpentine, citrus and petro-derived products) will continue to affect margins. We believe, if unchecked, higher costs and operating expenses are likely to prove detrimental to its margins and profitability.
In 2017, a fire at the manufacturing facility of BASF Group ("BASF"), one of the company’s suppliers, compelled it to declare a force majeure and resulted in a disruption of the availability of certain ingredients utilized in some of the fragrance and flavor compounds. This BASF supply chain disruption issue impacted the margins of the Fragrances segment in the first three quarters of 2018, which is likely to persist in the fourth quarter of 2018 as well. Moreover, increased environmental actions on suppliers in China will impact International Flavors & Fragrances’ operations.
Also, in the last five years (2013-2017), the company's long-term debt has risen 11.8% (CAGR) while the balance of $1,717 million at the end of the third quarter of 2018 represents sequential growth of 6%. Moreover, the company's total debt/total equity ratio was pegged at 108% at the end of third-quarter 2018, which is a concerning factor.
Unfavorable Zacks Rank
International Flavors & Fragrances currently carries a Zacks Rank #5 (Strong Sell).
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