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IFF Beat Earnings Estimates, but Stock Fell on Acquisition Deal

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IFF’s 1Q18 earnings

International Flavors and Fragrances (IFF) announced its 1Q18 earnings during market hours on May 7. In this series, we’ll discuss IFF’s 1Q18 earnings, revenues, the performances of its reporting segments, and its Frutarom Industries acquisition.

IFF reported adjusted EPS (earnings per share) of $1.69, an increase of 11.2 % on a YoY (year-over-year) basis. In 1Q17, IFF’s adjusted EPS were $1.52, which beat Wall Street expectations of $1.59. Its adjusted EPS exclude FDA-mandated product recall charges of $0.05, operational improvement initiatives, and integration-related costs.

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IFF’s growth in adjusted earnings was primarily driven by increased sales and a big reduction in its selling, general, and administrative expenses (or SG&A) as a percentage of its sales. IFF reported SG&A expenses of $142.6 million in 1Q18, representing 15.3% of sales. In 1Q17, IFF’s SG&A expenses represented 17.3% of its sales, a reduction of 200 basis points on a YoY basis. However, the cost of goods sold (or COGS) increased by ~20 basis points on a YoY basis. At the end of 1Q18, IFF had outstanding shares of 79.39 million as compared to 79.41 million in 1Q17.

Stock price reaction

IFF’s stock price plummeted 10.7% and closed at $126.89. The huge decline was not because of the earnings, but because of its announcement of the acquisition of Frutarom for $7.1 billion in cash and stock. Investors appeared to be unhappy with the deal price. Investors believe that the premium paid is expensive and are doubtful about its worthiness. We will look into the acquisition details later in this series.

Peers Sensient Technologies (SXT) and Clorox (CLX) rose 1.7% and 0.5%, respectively, while Estée Lauder (EL) fell 1.4%.

EPS guidance

IFF maintained its guidance that adjusted EPS for 2018 would grow in the range of 5.5%–7.5% compared to the previous year.

Investors can consider the PowerShares S&P 500 Equal Weight Materials Portfolio (RTM), which invests 4.1% of its portfolio in IFF as of May 7, 2018.

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