How’s IFF Valued before Its 4Q16 Results?
Forward price-to-earnings multiple
The forward PE (price-to-earnings) multiple is a relative valuation method that considers the company’s future earnings. As of February 7, 2017, International Flavors and Fragrances (IFF) traded at a one-year forward PE multiple of 19.90x—compared to its peer Sensient Technologies (SXT). Sensient Technologies is trading at a one-year forward PE multiple of 21.80x.
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The forward PE ratio tells how much investors are paying per dollar of expected earnings in the next 12 months. Using the PE ratio, investors can compare two or more companies that operate in the same industry. Investors can decide which stock is overvalued or undervalued.
IFF’s valuation compared to its peers
As on February 7, 2017, International Flavors and Fragrances was trading at a discount compared to Sensient Technologies. Before 3Q16, International Flavors and Fragrances was trading at a premium to Sensient Technologies, but lower-than-expected 3Q16 results had an impact. Although International Flavors and Fragrances’ revenue rose in 3Q16 compared to 3Q15, it fell short of analysts’ estimates. International Flavors and Fragrances’ margins fell in 3Q16 on a YoY (year-over-year) basis due to higher operating costs. As a result, the stock price fell 11.0%.
On the other hand, Sensient Technologies posted better-than-expected 3Q16 results. Its profit margin rose by ~200 basis points on a YoY basis.
However, the journey ahead looks more interesting with its vision 2020 program. International Flavors and Fragrances expects to increase its revenue by $500 million–$1 billion through acquisitions. The company acquired David Michael and Fragrance Resource. It also entered into a strategic partnership to ensure a better supply of raw materials at a better price, which could bring down the cost of sales.
With its cost control measures, International Flavors and Fragrances has been able to manage fairly consistent net profit margins over several quarters. With revenue growth and a better margin, International Flavors and Fragrances’ valuations could improve and turn the tables in its favor again.
Investors can indirectly hold International Flavors and Fragrances by investing in the iShares U.S Basic Materials ETF (IYM). IYM invested 1.50% of its holdings in International Flavors and Fragrances as of February 7, 2017. IYM’s top holdings include Dow Chemical (DOW), Dupont (DD), and Monsanto (MON) with weights of 10.9%, 10.8%, and 7.7%, respectively.