International Flavors & Fragrances Inc. (IFF, Financial) is the world’s largest speciality chemicals company that focuses on creating unique tastes and smells for brands, ranging from beverages and candy to perfume, cleaning products and even vitamin tablets.
Since going public in 1982, the stock is up by over 1,900%. Beginning in 2017, however, the share price has been volatile and stayed within a range of $113 to $152, with the average at around $130, which is where the stock trades today.
Renowned activist investor Carl Icahn (Trades, Portfolio) bought shares of International Flavors & Fragrances in the first quarter at an average price of $133. Value investor Joel Greenblatt (Trades, Portfolio) also added to his position at a similar level. Let’s dive into the business model, financials and valuation to see if this stock is a potential value opportunity.
Business model
As mentioned, International Flavors & Fragrances is a gigantic speciality chemicals company that focuses on creating unique flavors and scents for brands. In simple terms, a brand will basically approach the company and say “we are creating a new beverage and we want it to have a citrus taste,” and it will provide the chemicals to do this. Another example could be a perfume or shower gel which the brand wishes to smell like pomegranate and apricot. Since International Flavors & Fragrances can help with creating these unique blends, its tagline is “Where science and creativity meet.”
International Flavors & Fragrances was founded in 1958 through a merger between Polak & Schwarz and Van Ameringen-Haebler in a small Dutch town. The company quickly scaled to 36 offices globally and today it has over 210 manufacturing facilities, creative centers and laboratories. The company has over 24,000 employees and operates at a gigantic scale.
In 2021, the company completed a merger with DuPont’s Nutrition & Biosciences business. The company is unmatched when it comes to scale and is clearly the market leader, serving over 45,000 global customers. The company is well diversified across four segments, which are Nourish, Health & Biosciences, Scent and Pharma Solutions. The nourish segment is the largest by sales with the fastest growth (up 16%) in the first quarter of 2022.
Source: International Flavors & Fragrances' presentation.
Growing financials
International Flavors & Fragrances' first-quarter earnings report, which was released May 10, showed some rapid growth for a company with a $33 billion market cap. Sales increased by 31% (13% currency neutral) to $3.2 billion, while adjusted Ebitda came in at $702 million.
Free cash flow was -$136 million due to increased working capital requirements and higher capital expenditures. Capex was $132 million, or around 4.1% of sales. The company operates with a gross margin of 32% and a fairly tight operating margin of just 5.36%. International Flavors & Fragrances invested $629 million into research and development for fiscal 2021, which was close to double compared to prior years, but full-year revenue also doubled between 2020 and 2021. Thus, the percentage is the same.
On the balance sheet, the company has $11.7 billion in gross debt, which is very high, but approximately $10 billion of this is long-term debt, which does make it manageable for a large, mature company. Cash and cash equivalents finished the three-month period at $662 million. Net debt-to-credit-adjusted Ebitda was 4.2 times.
The GF Value Line, which analyzes historic multiples, past financial performance and future earnings projections, indicates the company to be fairly valued at the current price of $129 per share.
The company's enterprise value-Ebitda multiple of 20.4 is lower than the crazy levels of over 50 seen in 2021 and in line with historic averages. The stock does trade at a slightly higher multiple than competitor Sensient Technologies Corp.'s (SXT, Financial) 17.6, but International Flavors & Fragrances is approximately 10 times larger by market capitalization and is an industry leader.
Final thoughts
International Flavors & Fragrances is a true leader in unique scents and seasonings globally. Its dominant market position, patented formulas and diversified portfolio gives the company a competitive edge. Thus, it’s not surprising the stock has attracted legendary investors such as Icahn and Greenblatt.
