International Flavors Down 19% YTD: Will It Bounce Back?

Shares of International Flavors & Fragrances Inc. (NYSE:IFF) have depreciated 19.8% year to date, as against the industry’s growth of 12.8%. This downside resulted from input cost inflation and unfavorable foreign-currency translation impact. Further, huge debt levels are a concern.

Factors Plaguing International Flavors

The International Flavors stock dipped 24.7% following its second-quarter 2019 (ended Jun 30, 2019) earnings release. The company delivered adjusted net earnings of $1.30 per share, reflecting a year-over-year decline of 21.6%. The bottom-line figure significantly lagged the Zacks Consensus Estimate of $1.61.

The company’s margins remain under pressure, due to raw-material cost inflation. International Flavors anticipates mid-single-digit inflation from raw material in the current year as synthetic materials continue to rise, driven by several supply chain disruptions. Moreover, natural ingredient costs like vanilla and citrus remained elevated near historical levels. Notably, raw-material cost inflation in the scent division is expected to hurt the company’s margin this year.

Further, the company's presence in international markets has exposed it to currency-translation risks. Unfavorable currency-translation impact will likely be a headwind on combined sales growth and on combined adjusted earnings per share, excluding amortization for the current year.

Of late, the company has been grappling with the adverse impacts of rising costs and expenses. In the last five years (2014-2018), the company’s cost of sales has witnessed a compound annual growth rate (CAGR) of 7%, while adjusted selling, general and administrative, and research and development expenses together have increased at a CAGR of 8%. We believe, if unchecked, higher costs and operating expenses will be detrimental to its margins and profitability.

A highly-leveraged balance sheet can inflate International Flavors’ financial obligations, and subsequently, hurt profitability. Following the debt raised to fund the Frutarom acquisition, the company borrowed $3.3 billion of debt. The higher interest burden may have a negative impact on the ongoing year’s earnings per share.

Will the Stock Rebound?

International Flavors is likely to gain from growth in the flavors and fragrances’ global market, aided by surge in demand for a variety of consumer products, containing flavors and fragrances. Notably, the flavors and fragrances market is projected to be up approximately 2-3% by 2021, primarily driven by anticipated growth in emerging markets.

Furthermore, the company’s latest business wins and a diversified product portfolio worked in favor of International Flavors. The company has made acquisitions, which helped expand its offerings. Last October, International Flavors completed the acquisition of Frutarom. Together, International Flavors and Frutarom have created a global leader in natural taste, scent and nutrition, with a broader customer base, more diversified product offerings and more exposure to end markets, including those with focus on naturals, and health and wellness.

The company’s focus on driving efficiencies through costs and productivity initiatives, margin improvement, acquisition-related synergies and favorable taxes will drive overall profits. In February 2017, International Flavors entered a multi-year productivity program, designed to improve overall financial performance. This initiative will enable the company to check costs, make investments and expand businesses globally. It projects this productivity program to yield annualized savings of $40-$45 million by the end of 2019.

Zacks Rank & Stocks to Consider

International Flavors currently carries a Zacks Rank #4 (Sell).

A few better-ranked stocks in the basic materials space are Kinross Gold Corp. (NYSE:KGC) , Alamos Gold Inc. (TSX:AGI) and Arconic Inc. (NYSE:ARNC) , each flaunting a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kinross has an expected earnings growth rate of a whopping 140% for 2019. The company’s shares have surged 63.4% over the past year.

Alamos Gold has an outstanding projected earnings growth rate of 280% for the current year. The company’s shares have appreciated 56.5% in a year’s time.

Arconic has an estimated earnings growth rate of 42.7% for the ongoing year. The stock has rallied 17% in the past year.

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