Here's Why You Should Hold on to International Flavors (IFF)

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We issued an updated research report on International Flavors & Fragrances Inc.IFF on Jun 11.

This industrial gas producer and supplier currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $10 billion.

We briefly discussed the company's potential growth drivers and possible headwinds below.

Factors Favoring International Flavors & Fragrances

Diversity and Strategic Initiatives a Boon: International Flavors serves a wide range of customers, including manufacturers of perfume and toiletry, soaps, detergents, fabric care, household cleaners and air fresheners. Also, the company's businesses are spread in North America; Europe, Africa and the Middle East; Latin America and Greater Asia. Such diversification helps the company to negate weaknesses in one or more business sources or operating areas.

In addition to diversity, the company's diligent efforts to innovate products, by a dedicated research and development wing, will be advantageous. Notably, the company's introduction of Veraspice - a fragrance ingredient; Re-Imagine - programs that enable the company to pursue unaddressed opportunities in the food and beverage industry as well as assist the company in its innovation initiatives; and Tastepoint - a new company formed to serve middle-market customers are worth mentioning here.

Also, the company has been working on its multi-year productivity program, anticipated to yield annualized savings of $40-$45 million by the end of 2019. These programs are predicted to help the company reduce its global workforce by 5%, reduce costs, make suitable investments and expand business globally.

Acquisitions: Another interesting aspect about International Flavors is its acquisitive nature. Over time, the company has solidified its product portfolio and leveraged business opportunities through the addition of assets. Here, buyouts of David Michael & Company in October 2016, Fragrance Resources in January 2017 and PowderPure in April 2017 are worth mentioning.

In May 2018, the company signed an agreement to combine its operations with Frutarom. While anticipated to be neutral to earnings per share in the initial year of the deal closure, this buyout is predicted to yield double-digits earnings accretion for the second year. Also, run-rate cost synergies of $145 million are predicted to be realized by the third year.

For 2016-2020 timeframe, the company anticipates acquisitions to generate approximately $500 million to $1 billion in revenues.

Growth Projections: For 2018, International Flavors anticipates achieving better sales and operating income results. The company is now targeting the upper-end of its previously-issued sales and operating income growth projections of 6-8% and 6.5-8.5%, respectively. Earnings per share are projected to increase 5.5-7.5% or 4-6% on a constant-currency basis.

In the 2016-2020 timeframe, the company anticipates local currency sales to grow 4-6% while predicts operating income and earnings per share to expand 7-9% and more than 10%, respectively. Results will benefit from business expansion in emerging markets and growth opportunities stemming from acquired assets. Capital spending will be 3-3.5% of net sales. Shareholders will be rewarded with returns amounting 50-60% of net income.

Factors Working Against International Flavors & Fragrances

Stock Performance and Earnings Estimates: In the last three months, International Flavors' shares have declined 11%, underperforming 1.1% growth recorded by the industry .

Moreover, earnings estimates on the company have been revised downward in the last 30 days. The Zacks Consensus Estimate is currently pegged at $6.24 for 2018 and $6.79 for 2019, representing declines of 0.8% and 0.4% from their 30-day-ago respective tallies. Also, the company has an Earnings ESP of -1.28% for 2018 and -3.09% for 2019. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Rising Costs & Expenses Raise Concerns: International Flavors is dealing with adverse impacts of rising costs and operating expenses. Notably, the company's cost of sales in the last five years (2013-2017) grew at 2.8% (CAGR) while its operating expenses (including adjusted selling, general and administrative as well as research and development expenses) went up 2.4%. The trajectory continued in the first quarter of 2018 as well, with costs and sales, and operating expenses increasing 13% and 7.6% from their respective tallies in the year-ago comparable quarter. We believe that unwarranted rise in costs and expenses will prove detrimental to the company's margins and profitability.

Long-Term Debt: International Flavors is a highly leveraged company. In the last five years (2013-2017), the company's long-term debt has soared 11.8% (CAGR) while grew roughly 2.7% sequentially to $1,676 million at the end of first-quarter 2018. Also, the company's total debt/total equity has increased from 63.6% in 2013 to 96.6% in 2017. It was 94.2% at the end of first-quarter 2018. We believe, if unchecked, high-debt levels can inflate the company's financial obligations and put pressure on margins.

Stocks to Consider

Some better-ranked stocks in the industry are DAQO New Energy Corp. DQ , Ferro Corporation FOE and Ingevity Corporation NGVT . While DAQO New Energy sports a Zacks Rank #1 (Strong Buy), both Ferro and Ingevity carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

In the last 60 days, earnings estimates for each of these stocks improved for the current year. Also, average positive earnings surprise for the last four quarters was 22.47% for DAQO New Energy, 6.25% for Ferro Corporation and 20.51% for Ingevity Corporation.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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