We recently maintained a Neutral recommendation on New York-based, International Flavors & Fragrances Inc. (IFF). The company is one of the leading companies engaged in the creation and manufacturing of fragrance and flavor products in the United States and internationally.
The fragrances segment markets its products primarily to the cosmetics industry, including perfume and toiletries manufacturers besides the household products industry comprising the manufacturers of soaps, detergents, fabric care, household cleaners, and air fresheners. The flavors segment chiefly targets the food and beverage industries.
With the economy reviving from the global crisis, consumer spending is seen to be gathering momentum, a positive driver for the flavors and fragrances industry. Moreover, going forward, the company’s success will be driven by its substantial geographical presence and product mix.
Over the long term, the company hopes to achieve around 4%-6% growth in local currency sales, about 7%-9% operating profit growth and over 10% earnings per share growth. Capital spending over the years will be concentrated on seizing opportunities in emerging markets. Besides, bolt-on acquisitions will be given preferences to gain access to desirable customers, regions, or technologies. The company also anticipates an increase in dividend roughly in line with its EPS and pursuing buybacks.
For the fiscal year 2011, management expects its financial performance to be along the lines of its long-term targets. Foreign currency sales are quite likely to be favorable, while capital spending is expected to approximate 5% of sales for the full year 2011.
Results in the near term, however, might get impacted from challenging comparables for the Fragrance business. Additionally, it is anticipated that gross margin would be under pressure due to higher input costs. In the first quarter 2011, the company’s input costs escalated by 9% while research and development expenses also increased by the same magnitude. Selling and administrative expenses, however, registered a modest fall of 1%.
The company faces stiff competition from Danisco A/S and Firmenich SA. Thus, anticipating the company to perform in line with the market, we maintain a Neutral recommendation on the stock.
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