Morningstar | Narrow-Moat Sensient Technologies Reports Flat 2Q Profits; Margin Expansion Will Prove Challenging
We are maintaining our $76 per share fair value estimate for narrow-moat Sensient Technologies after the company's second-quarter earnings release. With profits coming in a bit lower than we anticipated, we modestly reduced our near-term profit outlook. Additionally, driven largely by currency effects, management reduced its 2018 adjusted earnings guidance to a range of $3.60-$3.70 per share, down from $3.70-$3.80. Our updated forecast of $3.61 per share sits on the low end of this range.Sensient's adjusted operating income was effectively flat versus the prior-year period at $52 million. Although the company's top line grew 7% to $363 million, elevated onion costs as well as low utilization at a North American flavor plant affected by recent restructuring efforts drove margin contraction. Although profit growth will remain muted in the third quarter as these issues linger, profit growth should recover in the fourth quarter.
We forecast a 15.4% adjusted operating margin for 2018, which represents a 40-basis-point decline from 2017. We buy into the notion that the final ripples from a wave of restructuring efforts from 2014 to 2017 had a negative impact on first-half results. However, after profitability normalizes by the end of the year, we see few inroads to significant margin expansion thereafter. Our midcycle adjusted operating margin forecast is 16%. This involves a midcycle operating margin assumption of 17% for the flavors and fragrances segment, shy of management's long-term target of 20%. Regardless, we expect an improving top line to usher in slow but steady profit growth over our explicit forecast period. Additionally, we forecast steady returns on invested capital just above 10% (including goodwill) through 2022, reflective of the company's durable intangible assets and switching costs.
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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