International Flavors and Fragrances Earnings: Near-Term Profits Weak, But Solid Long-Term Outlook

International Flavors and Fragrances Stock at a Glance

• Fair Value Estimate: $140
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide

International Flavors and Fragrances Earnings Update

We maintain our $140 per share fair value estimate for International Flavors and Fragrances after updating our model to incorporate the company’s first-quarter results. Our wide moat rating is also unchanged. IFF shares were down 10% at the time of writing as the market reacted negatively to both the company’s weak start to 2023 and management’s second-quarter guidance below consensus expectations.

While the near term will see profits decline, we continue to see a solid long-term outlook. We view IFF shares as materially undervalued, with the stock trading in 5-star territory. In our view, IFF’s turnaround is just beginning as the company is poised to grow profits at a high-single-digit rate from 2024-26. Volumes should recover, and management is implementing cost reductions to drive margin expansion.

We had already modeled a profit decline in 2023 driven by an economic slowdown, which we think will weigh more heavily on the first half of the year as IFF sees lower volumes and runs its plants at lower utilization to reduce excess inventory. Directionally, we think IFF will generate sequentially higher profits each quarter throughout 2023. As demand returns and plant utilization ramps up, IFF should see a profit boost over the next several quarters. Further aiding profit recovery, cost inflation should begin to subside, boosting profits as IFF’s customer contracts lag the company’s realized costs.

IFF carries elevated debt levels from the acquisitions of Frutarom and DuPont’s nutrition and biosciences business. The company’s leverage ratio sat at 4.6 times at the end of the first quarter. Over the coming quarters, IFF should close its two announced divestitures that should net proceeds of around $900 million after taxes and fees, which will be used to pay down debt. We think the company will likely end 2023 with a leverage ratio of around 4 times. As EBITDA begins to grow in 2024, we expect leverage will fall and eventually reach under 3 times by 2025.