International Flavors and Fragrances’ Shares Offer Strong Upside

International Flavors and Fragrances’ shares have underperformed since the start of 2022 as cost inflation weighed on profit growth. While the stock rebounded during the fourth quarter of 2022, shares fell 19% on Feb. 8, when the firm released its fourth-quarter earnings and cut 2023 guidance due to declining volumes. While we lowered our near-term estimates, we view the selloff as an overreaction to lower near-term profits.

With shares trading in 5-star territory relative to our $140 per share fair value estimate, we view the current prices as an excellent opportunity for long-term investors to pick up shares of wide-moat IFF. 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.

Finally, the current price 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.