Morningstar | Sensient Technologies Issues Soft 2Q Results and Cuts Guidance; Our Long-Term Outlook Remains Intact
Sensient Technologies cut its 2019 guidance amid soft second-quarter results and tariff-driven cost headwinds that will persist into the second half of the year. Shares traded lower in light of the news. However, our forecasts were already on the low end of management's guidance and our fair value estimate is unchanged at $74 per share. Our narrow-moat rating remains intact as we reiterate our view that intangible assets and switching costs will support ongoing economic profit generation over at least the next decade.Having emerged from its major restructuring efforts in mid-2017, Sensient has struggled to restore revenue or profit growth. Revenue has declined year on year for four consecutive quarters and adjusted EBITDA for five. Although we see no catalysts that are likely to have an outsize impact on the company's margin profile going forward, we do expect modest margin expansion from prevailing levels as raw material cost headwinds abate and structural cost savings take hold.
For 2019, we forecast $253 million of adjusted EBITDA (down from our prior forecast for $263 million) on revenue of $1.38 billion. This represents an 18.3% margin, modestly below our midcycle forecast just below 20%. Our EBITDA forecast is consistent with management's guidance to a slight decrease from $257 million in 2018.
At the segment level, we are skeptical that the flavors and fragrances segment will come close to achieving management's aspirational 20% operating margin forecast. Flavors and fragrances' margins have remained in the low-double digits since late 2017 and we forecast a 16% midcycle (2023) operating margin. We expect margins for the color group and Asia-Pacific group to remain relatively flat.
After today's sell-off, share are trading at a discount to our estimate of intrinsic value and we view this as an enticing entry point. Although profits have been a bit soft in recent quarters, Sensient remains a competitively advantaged, highly stable business.
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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