International Flavors & Fragrances Offers Investors Strong Upside as Market Sours on Stock

Wide-moat International Flavors and Fragrances’ IFF shares are trading in 5-stare territory, well below our $140 per share fair value estimate. Where the market sees caution, we view the current price as an excellent opportunity for long-term investors to pick up shares. We think the market is concerned that cost inflation will continue to hurt profits and is skeptical of management’s long-term growth strategy.

We see little long-term impact from cost inflation. We analyzed IFF’s businesses during previous times of cost inflation and found that near-term profits were hurt by inflation, but there was no long-term growth impact. Accordingly, as cost inflation stabilizes in 2023, we expect IFF’s profits will rebound beginning in 2024.

Additionally, we think management’s long-term growth strategy is likely to succeed. In our view, the plan to invest in capacity-constrained businesses will allow IFF to grow volumes above the industry rate. The plan to consolidate and reduce overhead expenses will create tangible cost savings that will drive profit growth in excess of revenue growth.

However, for investors who are skeptical of management’s long-term plan, current prices offers a solid margin of safety. Shares trade slightly below our bear-case fair value estimate of $100 per share. Our bear case assumes IFF falls well short of management’s long-term guidance for 8% to 10% adjusted EBITDA growth from 2024-26. Our bear case assumes IFF only generates 4% to 5% profit growth during this time. As such, we think most of the bad news is already priced into shares, leaving investors with stronger upside potential.