A big Israeli acquisition will more than triple the number of products this company can offer to customers.
The company has a strong niche in compounds that improve the flavour of food and the smell of consumer products. This $7-billion acquisition will give it more than 100,000 products and expand its customers around the globe. The company spends heavily on research, which can cut into its earnings, but in the most recent quarter its earnings beat the consensus estimate. As well, it recently raised its dividend, which yields 2.1%.
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INTERNATIONAL FLAVORS & FRAGRANCES INC. (New York symbol IFF; www.iff.com) makes over 38,000 compounds that improve the taste of food and the smell of consumer products. The company was founded in 1889 and is headquartered in New York. Currently it has 37 manufacturing facilities and six research and development centres.
On October 4, 2018, the company completed its acquisition of Frutarom, an Israeli firm that makes over 70,000 flavouring products for over 30,000 customers in 150 countries. About 75% of those products come from natural sources.
If you include Frutarom’s debt, the deal was worth $7.1 billion in cash and shares. Frutarom shareholders now own 14% of the combined company. The new IFF will have annual sales of $5.3 billion. It expects the elimination of overlapping operations will let it cut $145 million from its annual costs by the end of the third year.
If you exclude costs related to that purchase and other unusual items, IFF earned $125.9 million in the three months ended September 30, 2018. That’s up 7.9% from $116.7 million a year earlier. The company sold shares to help pay for Frutarom, which is why earnings per share rose just 4.8%, to $1.54 from $1.47. That still beat the consensus estimate of $1.50 a share.
Revenue in the quarter, excluding Frutarom, rose 4.0%, to $907.5 million from $872.9 million. That also beat the consensus forecast of $894.3 million.
Growth Stocks: Company raised its dividend with the October 2018 payment
Revenue from the flavors business (48% of the total) rose 6.4% on new contracts and higher selling prices. Revenue from fragrances (52%) gained 1.8% as lower volumes on existing contracts offset higher volumes and prices on new contracts.
IFF continues to streamline its operations and cut jobs. It expects those moves will reduce its annual costs by $40 million to $45 million starting in 2019.
In addition to Frutarom, the company has acquired a number of smaller firms. Using acquisitions to expand adds risk. However, the Frutarom deal will give IFF access to the Israeli firm’s product development expertise. As well, it will increase IFF’s exposure to faster-growing small- and medium-sized customers.
Last year, the company agreed to settle a patent-infringement lawsuit brought against it by ZoomEssence Inc., which makes a broad range of powder flavours for brands around the globe. As a result, IFF paid $56.0 million to ZoomEssence. That’s equal to 46% of the $121.1 million, or $1.52 a share, it earned in that year’s first quarter. However, the settlement will have little long-term impact on the company’s prospects.
IFF will probably earn $6.29 a share in 2018. The stock trades at 21.8 times that forecast. The company continues to spend a high 8% of its sales on research. That hurts its current earnings, and inflates its p/e. However, that spending helps it develop new products and spur its sales.
With the October 2018 payment, the company raised its quarterly dividend by 6% to $0.73. The annual rate of $2.92 yields 2.1%.
Recommendation in Wall Street Stock Forecaster: International Flavors and Fragrances is a buy.
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