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Faisal Humayun
Faisal Humayun
Articles (681) 

Sensient Technologies: Buy This Market Leader In Food Colors

August 12, 2015 | About:

Sensient Technologies (NYSE:SXT) might not be in the radar of many investors, but the stock is an excellent buy and hold for long term. This article discusses the company’s business and key growth drivers that makes the stock attractive to consider for portfolio.

Sensient Technologies develops, manufactures and markets flavors and fragrances that are found in consumer products. The company’s flavors and fragrances find application in food, beverage and household and personal care products. The company ranks one globally in food and beverages colors with the segment generating 59% of the company’s revenue. The company also ranks one in cosmetic ingredients with the segments generating 22% of the company’s revenue. Sensient Technologies is also a global leader in digital inks while the company ranks second globally in the pharmaceuticals excipients segment. Therefore, the company is a market leader and has strong global presence.

Global leadership position is already the first positive point related to the company. The next important point is that the company’s top customers include Kraft Foods (OR3B), PepsiCo (NASDAQ:PEP), Nestle (NESN), Mars and Bayer (BAYN) among others. With a strong client base that includes some of the world’s largest companies in the consumer sector, I see revenue visibility for Sensient Technologies as firm.

The next reason to be bullish on Sensient Technologies is the focus on China and Asia Pacific. In the last few years, the company’s revenue has stagnated and it is important for the company to enter high growth markets to revive revenue growth. Sensient Technologies has moved in the right direction from this perspective and the company is developing products that focus on local taste and preference in the APAC region. Over the next few years, I see the company making strong inroads in China and India. This will help Sensient Technologies overcome the revenue stagnation.

The revenue for Sensient Technologies might have stagnated in the last few years, but the company’s EPS growth and dividend growth has been robust as operational efficiency has translated into higher EBITDA margin. The company’s EPS has grown at a CAGR of 8.1% in the last five years and I expect decent EPS growth to continue.

Increasing margins and robust operating cash flows will help Sensient Technologies increase dividends on a continued basis. The company currently has a dividend payout of $1.08 per share and the dividend payout has increased at a CAGR of 5.4% in the last 5-years. In addition, the company has also created shareholder value through share repurchase. Therefore, the focus is investor friendly and I expect better returns for shareholders as growth in APAC gains traction.

From a valuation perspective, Sensient Technologies expects FY15 EPS to be in the range of $2.49 to $2.58 (EPS from continuing operations). The stock is therefore trading at nearly 27 times FY15 earnings. I don’t see this as expensive valuations considering the stability of business, global leadership position and decent dividends growth. Further, adjusted EPS (including restructuring) is likely to be in the range of $3.0 to $3.09 per share.

I view Sensient Technologies to being in a transformative stage of growth through innovation and expansion in new markets. Investors with a time horizon of at least three years can consider buying the stock at current levels. The stock has trended higher by 11% in YTD15 and I expect decent returns to be generated in the foreseeable future as well.

About the author:

Faisal Humayun
Faisal is a Senior Research Analyst with ten years of experience in equity research, credit research, economic research and financial modeling.

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