INTERNATIONAL FLAVORS & FRAGRANCES INC. $86 (New York symbol IFF; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 81.5 million; Market cap: $7.0 billion; Priceto- sales ratio: 2.5; Dividend yield: 1.8%; TSINetwork Rating: Above Average; www.iff.com) makes over 36,000 unique compounds that improve the taste of foods and the smell of a wide variety of consumer products. Major clients include Procter & Gamble, Nestle, Kraft, Unilever and General Mills.
The company has two divisions: Flavors, which makes ingredients for soups, soft drinks and gum; and Fragrances, which produces compounds for soaps, detergents and air fresheners. Each business supplies roughly half of IFF’s sales and earnings.
Big opportunity in emerging markets
IFF continues to benefit from its plan to focus on fast-growing countries like China, India and Brazil. It now gets 75% of its sales from outside the U.S. and 45% from emerging markets. However, that also increases its exposure to volatile foreign currency rates.
Unfavourable exchange rates pushed down IFF’s sales by 2.6%, from $2.4 billion in 2008 to $2.3 billion in 2009. However, sales rebounded to $2.6 billion in 2010 and reached $2.8 billion in 2012.
Earnings held up exceptionally well in the recession. They fell just 2.5%, from $2.76 a share (or a total of $220.9 million) in 2008 to $2.69 a share (or $214.3 million) in 2009. Earnings then recovered to $3.26 a share (or $272.5 million) in 2010 and rose to $3.98 a share (or $327.5 million) in 2012.
IFF continues to fuel its growth with new products.
It spends about 8% of its sales on research, and works closely with customers to ensure the resulting substances meet their needs. These relationships make it harder for IFF’s competitors to lure away its clients.
Putting savings to work
Meanwhile, the company continues to close lessprofitable facilities in the U.S. and Europe, freeing up cash to invest in more promising areas. For example, it plans to spend $50 million on a new plant and research facility in Indonesia.
These savings are also giving IFF cash for acquisitions. It recently paid an undisclosed sum for Aromor Flavors and Fragrances, a private Israeli company that supplies ingredients to IFF. This familiarity helps cut the risk of this purchase. Aromor will add $35 million to IFF’s annual sales.
IFF’s strong balance sheet will help it keep expanding. Its long-term debt of $933.4 million (as of September 30, 2013) is a low 13% of its market cap. It also held cash of $343.1 million, or $4.21 a share.
Strong prospects justify high p/e
IFF is up 36.5% since we first recommended it in our May 2011 issue at $63. The stock now trades at 19.3 times the $4.46 a share that the company probably earned in 2013. That’s still a reasonable p/e ratio in light of IFF’s wide geographic presence and high research spending.
As well, the company has raised its dividend each year since 2003. The current annual rate of $1.56 yields 1.8%.
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