Why Is International Flavors (IFF) Down 26.9% Since Last Earnings Report?

It has been about a month since the last earnings report for International Flavors (IFF). Shares have lost about 26.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is International Flavors due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

International Flavors' Q4 Earnings & Sales Top Estimates

International Flavors reported adjusted earnings of $1.46 per share in fourth-quarter 2019, surpassing the Zacks Consensus Estimate of $1.42. The bottom-line figure increased 18.7% from the year-ago quarter’s $1.23.

Including one-time items, earnings per share in the quarter came in at 70 cents compared with the 9 cents recorded in the year-ago quarter.

In the reported quarter, International Flavors’ net sales were $1.3 billion, reflecting year-over-year growth of 5%. In addition, the top-line figure beat the Zacks Consensus Estimate of $1.2 billion. In the fourth quarter, the company registered high-single digit currency neutral sales growth and robust double-digit adjusted EPS growth.

Operational Highlights

In the December-end quarter, International Flavors’ cost of goods sold was up 5% year over year to $781.6 million. Adjusted gross profit inched up 0.8% year over year to $503 million. Adjusted gross margin came in at 39% compared with the 41% witnessed in the year-ago quarter.

Research and development expenses flared up 3% year over year to $85.6 million. Adjusted selling and administrative expenses during the final quarter of 2019 slipped 5.3% year over year to $195 million. Adjusted operating profit increased 7% year over year to $173.5 million. Adjusted operating margin came in at 13.5% compared with the year-ago quarter’s 13.3%.

Segmental Performances

Revenues in the Taste segment increased 7%, year over year, to $429.9 million during the October-December period. On a constant-currency basis, revenues improved 8% year over year driven by double-digit growth in Greater Asia and high single-digit growth in North America. Operating profit climbed 2% year over year to $78.7 million. The company witnessed stellar growth in Beverage and Savory, led by strong new business win.

Revenues generated in the Scent segment came in at $478.3 million, up 4% year over year. On a constant-currency basis, revenues grew 6% year over year. Operating profit increased 7% year over year to $73 million.

The Frutarom segment’s revenues came in at $375.6 million, indicating year-over-year growth of 4.5%. Operating profit was $32 million during the reported quarter compared with the $27 million recorded in the year-ago quarter.

Financial Position

International Flavors had cash and cash equivalents of $624 million as of Dec 31, 2019, down from the $648 million at the end of 2018. Long-term debt fell to $3,997 million as of Dec 31, 2019, from $4,504 million in 2018.

International Flavors generated $699 million of cash from operating activities during the 12-month period ended Dec 31, 2019, compared with the $438 million reported in year-earlier period. Capital invested in purchasing property, plant and equipment totaled $236 million as of Dec 31, 2019. Dividend paid totaled $313.5 million in 2019.

2019 Results

International Flavors reported adjusted earnings per share of $6.17 in 2019, up 0.9% from the prior year’s $6.23. Earnings, however, missed the Zacks Consensus Estimate of $6.18. Including one-time items, earnings per share came in at $4.00 compared with the $3.79 recorded in the last year.

Sales increased 29% year over year to $5.14 billion in 2019. The top-line figure came in line with the Zacks Consensus Estimate.

Outlook

International Flavors has issued its guidance for 2020. Sales are projected at $5.15-$5.35 billion. Adjusted earnings per share are expected in the $4.89-$5.14 band. Adjusted earnings excluding amortization are anticipated between $6.20 and $6.45.

However, currency is likely to erode top-line growth in the current year. Also, the company expects a modest impact from the recent coronavirus outbreak in Asia. It expects to achieve a net debt to EBITDA ratio of less than 3.0x by the end of this year.

Starting in first-quarter 2020, International Flavors will report financial results in two segments, Taste and Scent, incorporating all Frutarom business into the Taste segment. Moreover, in the ongoing year, the company is well poised to grow on the successful merger with DuPont (NYSE:DD) Nutrition & Biosciences.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, International Flavors has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise International Flavors has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.