Goldman Sachs downgraded International Flavors & Fragrances Inc (NYSE:IFF) to Neutral from Buy and cut its price target to $78.00 from $120.00 after the company reported a Q2 miss and cut its guidance, which resulted in a share price drop of more than 19% on Tuesday.
As a result of these developments, the bank perceives the company's ability to reach its medium-term EBITDA goals, as outlined during its investor day in December 2022, as increasingly challenging.
“With significant operating challenges in the Functional Ingredients (FI) business unit in Nourish persisting and representing the largest (though not sole) driver of forward estimate cuts, more significant asset divestitures, with their attendant risks on tax/earnings/cash flow leakage, become even more critical for IFF to achieve its deleveraging target of 3.0x net debt/EBITDA by YE24 (vs. 4.5x at 2Q23),” mentioned Goldman Sachs.
According to the bank, the cumulative effect of various operational challenges that IFF has faced over the past few years has eroded their confidence that the current quarter represents the clear bottom in forward earnings expectations.
While acknowledging that macro demand conditions have been more difficult than anticipated over the past year, Goldman noted that the substantial decline in results within the FI unit (which accounts for about 25% of total sales) indicates significant market share loss and/or pressures from commoditization. These issues are unlikely to be quickly resolved, in Goldman’s view.