IFF’s forward price-to-earnings
Forward price-to-earnings (or PE) is a relative valuation method that considers a company’s future earnings for calculation.
On December 26, 2016, International Flavors and Fragrances (IFF) was trading at a one-year forward PE multiple of 20.10x, compared to its peer Sensient Technologies (SXT), which was trading at a one-year forward PE multiple of 22.40x.
The forward price-to-earnings ratio tells us how much investors are paying per dollar of a company’s expected earnings for the next 12 months. Using the PE ratio, investors can compare between two or more companies that operate in the same industry and decide which are overvalued or undervalued.
IFF’s valuation compared to its peers’
On December 26, 2016, IFF was trading at a discount compared to SXT. Before 3Q16, IFF was trading at a premium to SXT, but its lower-than-expected 3Q16 results turned the tables. Though IFF’s revenue rose in 3Q16 compared to 3Q15, it fell short of analysts’ estimates. The company’s margins fell in 3Q16 on a year-over-year (or YoY) basis due to higher operating costs. As a result, the stock’s price fell ~9.0%.
SXT posted better-than-expected 3Q16 results. Its profit margin saw a rise of ~200 basis points YoY. As a result, the stock has risen ~5% since November 1, 2016.
However, the journey ahead looks more interesting due to the company’s Vision 2020 strategy. IFF expects to increase its revenue in the range of $500 million–$1 billion by way of acquisitions. IFF is already looking active and has begun acquiring several companies. It’s entered into strategic partnerships to ensure a better supply of raw materials at better prices, which could bring down the cost of sales.
With cost-control measures, IFF has been able to manage fairly consistent net profit margins over several quarters. With revenue growth and better margins, IFF’s valuations could see improvements, turning the tables in its favor again.
Investors can hold IFF by investing in the Guggenheim S&P 500 Equal Weight Materials ETF (RTM), which has invested 3.9% of its portfolio in IFF. The top holdings of the fund include Dow Chemical (DOW) and Monsanto (MON) with weights of 4.2% and 4.1%, respectively, as of December 26, 2016.