Morningstar | Although Sensient's Growth Has Stalled in Recent Years, We Forecast Modest Margin Expansion Ahead. See Updated Analyst Note from 18 Feb 2019
Having updated Sensient Technologies' valuation model after the company's fourth-quarter earnings release, our $74 fair value estimate and narrow-moat rating are unchanged.With Sensient's sizable restructuring program having ended in mid-2017, we were disappointed by the company's 2018 performance. Revenue and profits had decreased in recent years as management pruned the company's asset base. However, we had anticipated that 2018 would represent a return to more robust growth. In the end, sales grew only 1.8% and adjusted EBITDA fell 2.9% year on year. Sensient's results were negatively impacted by ongoing optimization to improve utilization across its footprint.
Largely in line with management's guidance, we forecast modestly improved revenue growth and a return to positive profit growth in 2019. We expect revenue to grow 3.4%, consistent with management's guidance to a "low- to mid-single-digit" growth rate. However, we are a bit more skeptical about the company's prospects for near-term margin expansion, as our adjusted EBITDA forecast of $261 million represents only a 1.6% increase year on year. Management, however, guided to mid-single-digit growth on this metric.
The main area where our outlook differs is that we forecast slightly lower near-term margins for the color segment. This would involve only 1.1% profit growth for the segment versus guidance to mid-single-digit growth. Although growing demand for natural color solutions will continue to drive impressive revenue growth for the segment, we contend that natural colors will prove to be a modestly lower-margin business than synthetic colors.
Sensient's recent sell-off likely represents the notion that, with restructuring efforts now over, the stock offers no material upside catalysts in the near term. However, with an improving product mix and pricing power from its combination of intangible assets and switching costs, we expect Sensient to deliver 100 basis points of margin expansion by 2023. Accordingly, the stock currently has a 4-star rating and offers attractive risk-adjusted upside potential.
Sensient Technologies is a manufacturer and marketer of colors, flavors and fragrances. The company's three reportable segments are: Flavors & Fragrances Group, which develops, manufactures, and supplies flavor and fragrance systems for the food, beverage, personal care, and household-products industries; Color Group, which provides natural and synthetic color systems for use in foods, beverages, pharmaceuticals, and nutraceuticals, colors and other ingredients for cosmetics; and Asia Pacific Group, which provides a range of products from its Flavors & Fragrances Group and Color Group, as well as products developed by regional technical teams to appeal to local preferences.
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.
We have operations in 27 countries.
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