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Where Does IFF’s Valuation Stand Compared to Its Peer?

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Forward PE ratio

The forward PE (price-to-earnings) ratio is a relative valuation method that considers the company’s future earnings. As of June 15, 2017, International Flavors & Fragrances (IFF) traded at a one-year forward PE (price-to-earnings) ratio of 22.60x—marginally lower than its peer Sensient Technologies (SXT), which traded at a one-year forward PE ratio of 22.80x.

The forward PE ratio is an indicator that tells how much investors are paying for the stock per dollar of expected earnings in the next 12 months. It’s one of the tools that gives investors an opportunity to compare two or more companies that operate in the same industry. The ratio helps investors determine if the stock is overvalued or undervalued.

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International Flavors & Fragrances’ valuations

International Flavors & Fragrances posted better-than-expected 1Q17 earnings. Its earnings rose 9% on an adjusted basis compared to the previous year. The company expects its fiscal 2017 earnings to be 6%–7% higher than the previous year. Although its earnings beat analysts’ estimates, the company’s revenue didn’t meet estimates. Its revenue rose 6% in 1Q17—compared to 1Q16. International Flavors & Fragrance’s aggressive acquisitions are expected to drive its future growth. In the past year, International Flavors & Fragrances acquired three companies. By 2020, the company plans to increase its revenue by $500 million–$1 billion through acquisitions. With its revenue growth plan intact, International Flavors & Fragrances’ earnings are also expected to grow. Analysts expect the company to post EPS (earnings per share) of $5.51 in fiscal 2017 and EPS of $6.27 in fiscal 2018, which reflects 4.1% and 93% growth year-over-year.

However, Sensient Technologies is showing similar earnings growth trends. Both companies are trading at similar multiples.

Investors can hold International Flavors & Fragrances indirectly by investing in the Vanguard Materials ETF (VAW), which has invested 1.3% of its holdings in the company. The fund’s other top holdings include Dow Chemical (DOW), DuPont (DD), and Monsanto (MON) with weights of 8.5%, 8.4%, and 6.1%, respectively, as of June 15, 2017.

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