Morningstar | Our IFF FVE Falls to $134 On Weaker Near-Term Profits; We Remain Skeptical of Frutarom Deal. See Updated Analyst Note from 15 Feb 2019
With management's 2019 guidance update and nearly a full quarter of Frutarom results in the books, we've tempered our near-term profit outlook for International Flavors & Fragrances. We've lowered our adjusted EBITDA forecasts by roughly $100 million over each of the next three years. Accordingly, our fair value estimate falls to $134 per share from $138. Our wide moat rating is unchanged, although returns on invested capital (including goodwill) will remain depressed versus historical levels as the Frutarom integration proceeds.We've also lowered our stewardship rating to Poor from Standard for multiple reasons. When management advertised its plans to increase revenue by $500 million-$1 billion via acquisition, we expressed concern that doing so would reduce negotiating leverage. Ultimately, our analysis of the Frutarom deal appears to confirm this concern, as we expect the segment to significantly reduce companywide economic profit generation. Additionally, IFF's C suite has been subject to significant turnover in recent years, and we are concerned that the recent embrace of growth via acquisition represents diminishing opportunities for value-accretive reinvestment. For example, research and development fell below 7% of sales in the fourth quarter after remaining above 8% in each of the six prior years. Deleveraging efforts after the sizable Frutarom deal could further damp reinvestment in the medium term.
For 2019, our $5.02 adjusted earnings per share forecast sits in the middle of management's guidance range of $4.90-$5.10. Our revenue forecast also falls within with management's guidance of $5.2 billion-$5.3 billion. However, we are skeptical of the company's long-term outlook. For 2019-21, we forecast just over 4% annual revenue growth versus guidance of 5%-7%. We forecast 8% annual earnings growth versus guidance of 10%. The market appears to share our skepticism, as the shares are trading slightly below our fair value estimate.
International Flavors & Fragrances is a creator and manufacturer of taste, scent and complementary adjacent products, including cosmetic active and natural health ingredients. The company's operating segments are Taste and Scent. The Taste segment develops a range of different flavors and taste offerings for its customers, most of which are tailor-made. The company's Taste business is comprised of various portfolios across flavor compounds, savory solutions, inclusions and nutrition and specialty ingredients. The Scent segment creates fragrance compounds and fragrance ingredients for the household and personal care products. The company also produces cosmetic active and functional ingredients for use in cosmetics.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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