We issued an updated research report on
International Flavors & Fragrances Inc. (NYSE:IFF) on Jan 21. The company will gain on cost cutting efforts, productivity initiatives, acquisitions and growth in global market for flavors and fragrances, particularly in emerging markets. Meanwhile, input cost inflation, disruptions in the supply chain owing to issues across International Flavors & Fragrances’ ingredients suppliers and huge debt levels is likely to impact results in the near term.
Let’s take a brief look at the company's potential growth drivers and possible headwinds.
Factors Favoring International Flavors & Fragrances
Acquisitions Aid Growth: Over time, the company has made meaningful acquisitions, which have helped expand offerings and in turn profitability. In October 2018, the company completed the acquisition of Frutarom, an Israeli company which develops, produces and markets flavors and fine ingredients. Together, International Flavors & Fragrances and Frutarom will create a global leader in natural taste, scent and nutrition with a broader customer base, more diversified product offerings and greater exposure to end markets. Frutarom is expected to be accretive to International Flavors & Fragrances’ fourth-quarter 2018 top and bottom-line results.
The company provided sales guidance of $3.95-$4.05 billion and earnings per share guidance of $6.25-$6.45 for fiscal 2018. The company anticipates generating cost synergies of $145 million through raw material harmonization, footprint optimization and streamlining overhead expenses for third full year after the completion of the merger. International Flavors & Fragrances expects the acquisition to aid the top line by 5-7% and growth of more than 10% in adjusted EPS going forward.
Recently, International Flavors announced that its Frutarom Division has completed the previously announced buyout of 60% share capital of Mighty, a Thailand-based leading savory solutions company. Notably, Mighty produces, develops and markets reaction flavors, with an expertise in savory solutions. The company has a portfolio of marinades, seasoning blends, flavors and specialty functional raw materials for the food and beverage industry. The deal is in sync with Frutarom Division’s growth strategy in Southeast Asia as well as pursuing attractive companies. Moreover, the company is committed to enhance its capabilities in savory solutions.
Emerging Markets to Fuel Demand: The global market for flavors and fragrances continues to grow fueled by increasing demand for a variety of consumer products containing flavors and fragrances. The market which was around $24.8 billion in 2017 is projected to grow approximately 2-3% by 2021, primarily driven by anticipated growth in emerging markets. Growing economy in these countries bolsters demand for consumer products, and in turn the demand for flavors and fragrances used in them. Consequently, International Flavors & Fragrances is focused on gaining share in emerging markets with sales in these emerging markets accounting for around 48% of 2017 sales.
Over the past five years, the company’s currency neutral sales growth rate in emerging markets has outpaced that of developed markets. Backed by the company’s global presence, diversified business platform, broad product portfolio, global and regional customer base, it will be able to capitalize on the expansion in flavors and fragrances markets and deliver long-term growth.
Cost Saving Initiatives to Aid Results: In February 2017, the company entered into a multi-year productivity program designed to improve overall financial performance, provide flexibility to invest in growth opportunities and drive long-term value creation. This initiative will enable the company to check costs, make strategic investments and expand businesses globally. This initiative is anticipated to result in the reduction of approximately 370 members of its global workforce. By the end of 2019, the company anticipates this productivity program to yield annualized savings in the range of $40-$45 million.
Factors Working Against International Flavors & Fragrances
Share Price Performance, Poor Valuation: In the last year, International Flavors' shares have fallen 9.8%, compared with the Zacks Investment Research
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Written By:
Zacks Investment Research