Topic: How To Invest

Selling flavors and fragrances to big consumer firms has this stock rising

Selling flavors and fragrances to big consumer firms has this stock rising

INTERNATIONAL FLAVORS & FRAGRANCES INC. (New York symbol IFF; 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.

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 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.

Stock investing: IFF closing less profitable U.S. and European operations and expanding into more promising areas

Meanwhile, the company continues to close less profitable 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. Aromor will add $35 million to IFF’s annual sales.

IFF’s long-term debt of $933.4 million (as of September 30, 2013) is 13% of its market cap. It also held cash of $343.1 million, or $4.21 a share.

IFF is up 36.5% since we first recommended it in our May 2011 issue at $63. As well, the company has raised its dividend each year since 2003. The current annual rate of $1.56 yields 1.8%.

In the latest edition of Wall Street Stock Forecaster, we assess IFF’s projected earnings in light of its high research spending to see whether the share price can continue to rise and the company can keep raising the dividend. We conclude with our clear buy-hold-sell advice on this stock.

(Note: If you are a current subscriber to Wall Street Stock Forecaster, please click here to view Pat’s recommendation. Be sure to log in first.)

If you’re a member of Pat’s Inner Circle and you’d like to ask a question about today’s article, please go to the question page reserved for you (be sure you’re logged in first). Click here to ask your question.

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

International Flavors & Fragrances is a company that many people haven’t heard of with a list of clients everyone has heard of. Have you bought any relatively unknown stocks because they did business with an impressive list of clients? Did this work out for you?

Comments

Tell Us What YOU Think

You must be logged in to post a comment.

Please be respectful with your comments and help us keep this an area that everyone can enjoy. If you believe a comment is abusive or otherwise violates our Terms of Use, please click here to report it to the administrator.