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International Flavors Rides on Favorable Demand, Costs High

We issued an updated research report on International Flavors & Fragrances Inc. IFF on Nov 6. The company is poised to gain from growth in global market for flavors and fragrances, acquisitions, costs and productivity initiatives, and diverse product portfolio. However, rising costs, unfavorable foreign-currency translation and huge debt levels are near-term concerns.

Poised for Better Results

For fiscal 2019, International Flavors’ sales are projected in the range of $5.15-$5.25 billion, representing year-over-year growth of 3-5%. Adjusted earnings per share are anticipated in the band of $4.85-$5.05, reflecting year-over-year growth of 8-11% in 2019. Adjusted earnings per share, excluding amortization, are projected in the band of $6.15-$6.35. The company has reaffirmed long-term financial targets for 2019-2021. On a currency neutral sales basis, it projects sales growth between 5% and 7% over the next three years and earnings per share (EPS) growth of 10%, excluding amortization.
Robust Prospects for Flavors and Fragrances Market
The global market for flavors and fragrances continues to grow, spurred by increasing demand for a variety of consumer products containing flavors and fragrances. The market is projected to grow approximately 2-3% by 2021, primarily driven by anticipated growth in emerging markets.
Consequently, International Flavors & Fragrances is focused on gaining share in emerging markets. 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.

Acquisitions: A Key Catalyst
Over time, the company has made meaningful acquisitions, which have helped expand offerings and in turn profitability. Last October, the company completed the acquisition of Frutarom, the largest deal in the industry to date. Together, International Flavors & Fragrances and Frutarom created a global leader in natural taste, scent and nutrition with a broader customer base, diversified product offerings and more exposure to end markets, including those with a focus on naturals and health and wellness.

The company anticipates generating cost synergies of $145 million through 2019-2021. Synergies are expected to come from procurement, footprint optimization and streamlining of overhead expenses.
Few Headwinds
Continued geopolitical tension and uncertainties regarding trade wars and Brexit remain concerns. Also, unfavorable currency is anticipated to act as a headwind on combined sales growth.

International Flavors & Fragrances is dealing with adverse impacts of rising costs and operating expenses. In the last five years (2014-2018), its cost of sales has witnessed a CAGR of 7% while adjusted selling, general and administrative and research and development expenses together have increased at a CAGR of 8%.

Also, the company’s debt level has gone up following the Frutarom acquisition. Higher interest expense will impact the company’s earnings.

Share Price Performance

Over the past three months, International Flavors’ shares have gained 9%, against the industry’s decline of 4.9%.

Zacks Rank & Key Picks

International Flavors currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Consumer Staples space are Inter Parfums, Inc. IPAR, Newell Brands Inc. NWL and Helen of Troy Limited HELE.

Newell Brands has an expected earnings growth rate of 28.68%. Shares of the company have rallied 24.2% over the past three months. The stock currently carries a Zacks Rank#1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Inter Parfums has a Zacks Rank #2 (Buy) and an expected earnings growth of 10.53%. The stock has gained 14.4% over the past three months.
Helen of Troy Limited has an estimated earnings growth rate of 7.57% for the ongoing fiscal. The shares of this Zacks Ranked #2 stock have gained 5% in the past three months.

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