Morningstar | Int'l Flavors & Fragrances Faces 1Q Year-Over-Year Margin Contraction, but Profit Growth Lies Ahead
International Flavors & Fragrances' first-quarter results revealed modest margin contraction but no major surprises. We've slightly reduced our 2019 profit outlook, but the impact was more than offset by time value of money effects. Our fair value estimate rises to $135 per share from $134. Our wide-moat rating is unchanged, as we contend that the company's powerful intangible assets and switching costs will persist long into the future.For 2019, we forecast $848 million of adjusted operating income and adjusted earnings (excluding amortization) of $6.36 per share. These both declined slightly from our prior estimates of $862 million and $6.40. Our earnings outlook remains within management's unchanged guidance to a range of $6.30-6.50, albeit toward the lower end. Our updated operating income forecast implies a 16.1% margin against our $5.26 billion revenue forecast. As the integration of Frutarom proceeds and the company's product mix otherwise improves, we expect adjusted operating margins will rise to 18% by 2023 (midcycle).
Indeed, the Frutarom integration will remain under the microscope in the coming quarters, particularly given what we believe to be a lofty deal price and aggressive synergy target of $145 million annually. Early results are inconclusive across the first two quarters in which Frutarom results have been provided. However, we are somewhat concerned that Frutarom sales have grown more slowly than the mid-single-digit growth rate expectation laid out by management. For Frutarom in 2020, we forecast an acceleration to 5% sales growth, and we anticipate that synergies will support modest margin expansion.
First-quarter results from the legacy taste and scent segments were fairly steady, even though margins did contract from the prior-year period. We forecast modest margin expansion going forward as the company's switching costs protect pricing power and management ushers in cost savings.
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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