Giving International Flavors and Fragrance the Smell Test
International Flavors and Fragrance , the creator of flavors and fragrances for various consumer products, is trading at all-time highs. Would this company by any other name smell as sweet? Let's perform a strength, weakness, opportunity, and threat (SWOT) analysis to find out.
- The company's emerging market presence is growing, and sales in emerging markets are now 49% of sales. With consumer packaged goods in emerging markets growing at two to three times the rate of developed countries, this is an advantage for International Flavors and Fragrance.
- To get boots on the ground in these emerging markets, the company has built several state-of-the-art creative centers since 2008 in locations such as Moscow, Singapore, Shanghai, Sao Paulo, Mumbai, Delhi, and Gebze. In the first half of this year, the company opened its Chinese flavors facility. According to the company's 2012 10-K, emerging market sales will outstrip those in developed markets by 2015.
- The company is shareholder friendly, with a dividend compound annual growth rate (CAGR) of 13% for the last three years. It has also been buying back shares with a $250 million buyback authorization, and plans to spend $50 million on buybacks in 2013.
- The company has big industry-influential clients like Lancome, Estee Lauder, Ralph Lauren on the fragrance side,and giants like Kraft Foods Group, Nestle, and Unilever in flavors.
- International Flavors and Fragrances boasts that it has the largest portfolio in the industry with over 1,200 fragrance ingredients. This portfolio is so large that competitors simply have to buy some of the company's ingredients.
- Thanks to cost-saving initiatives, emerging market growth, and a full order book with new client wins, CEO Douglas Tough guided for 10% EPS growth going forward.
- As mentioned in the company's most recent 10-K, volatility regarding the availability and cost of materials, especially for natural materials like citrus and vanilla, is always a risk. To that end, the company carries strategic stock in supply at all times.The company noted in its third quarter earnings call that supply costs have remained fairly stable, but having to raise prices for clients to cover costs is an ongoing concern. The company has already raised some prices proactively.
- With 29 factories worldwide, government regulation (including regulation from the FDA in the U.S. and European Union oversight) is a risk. The company has 77% of its sales ex-U.S., and both geopolitical and currency risk are concerns.
- The company spends 8.3% of its total sales on research and development. In the last dozen years, it has been awarded 235+ patents for "basic molecular discovery, new delivery systems, and new applications." One of the company's big hits in the past was its proprietary CoolTek, which gives gums and mints a chilly sensation without using menthol.
- The company is working with biotech Evolva Holdings "to produce a natural and sustainable source of vanillin." This is considered the Holy Grail of flavor chemistry as natural vanilla is extremely expensive; it is not only a common flavoring, but it is widely used in fragrances as well.This is a much bigger deal than it would seem at first as demand for even artificial vanillin has long outstripped supply, with 75% of it dedicated to ice cream and chocolate production.
Other costly natural ingredients with volatille cost and availability are on the agenda for R&D. Saffron, the world's most expensive spice, is a likely target as Evolva has been puzzling out that one as well..
- The company is capitalizing on the worldwide trend towards health and wellness by using salt and sweet modulation technology under the umbrellla flavor fit for their health and wellness flavors. The goal is to reduce salt and sugar in food by amping up other flavors. These applications are in high demand, and the company recently offered clients new beef and chicken essences in its trademarked CulinEssence program.
- In 2002, the company opened its own NYC Perfumery School to keep churning out the "noses" critical to keeping up with other perfume giants.
- The company has formidable rivals in Symrise, with a 10% market share, and Givaudan, a Swiss industry giant with a 20% market share. Givaudan is considered a top parfumeur and flavorist with its own school of perfumery, libraries of scent, and R&D into olfactory and culinary perception. Meanwhile, rival Firmenich, a privately-held Swiss company, holds 14% global market share.
International Flavors and Fragrances, along with these three, controls 2/3 of the global flavor and fragrance market. At the Barclays Back to School conference, the company noted that it has a 16% share of the $18 billion global flavor and fragrance market.
- Firmenich, Givaudan, and International Flavors and Fragrance all collaborate on flavor and fragrance molecule technology with small biotech Amyris . According to fellow Fool Maxx Chatsko, "(Amyris) CEO John Melo believes that by 2020 Amyris could hold 30%-40% of the flavor and fragrance supply for the molecules it is commercializing with the industry's leading companies, including International Flavors &Fragrances and Givaudan." This could add to collaboration revenue costs down the line for International Flavors and Fragrances.
- Inter Parfums , a smaller competitor in fragrances, is also trading at 52-week highs and has many upscale fragrance clients. Inter Parfums is trading at a lower trailing earnings multiple of 8.11 with a 1.3% yield, compared to International Flavors and Fragrances' 18.11 multiple and yield of 1.80%. Inter Parfums has a higher net profit margin of 30.40%, compared to International Flavors and Fragrances' net profit margin 12.40%.
The SWOT conclusion
As one of the top players in the flavor and fragrance industry, International Flavor and Fragrance is poised to keep performing well. Don't neglect due diligence on its Evolva and Amyris partnerships down the line, however. Keep an eye out for smaller Inter Parfums as well.
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The article Giving International Flavors and Fragrance the Smell Test originally appeared on Fool.com.AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.