International Flavors & Fragrances Quarterly Valuation – August 2014 $IFF

Iff_logoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Enterprising Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how International Flavors & Fragrances Inc. (IFF) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): International Flavors & Fragrances Inc. (IFF) creates, manufactures and supplies flavors and fragrances for the food, beverage, personal care and household products industries. The Company operates in two business segments: Flavors and Fragrances. Its Flavors business includes four categories of products: Savory, Beverages, Sweet, pharmaceutical and oral care (Sweet), and Dairy. Its Fragrances business consists of Fragrance Compounds and Fragrance Ingredients. The Company has 29 manufacturing sites around the world that support more than 36,000 products. Its manufacturing facilities are located in the United States, the Netherlands, Spain, Great Britain, Argentina, Brazil, Mexico, Australia, China, India, Indonesia, Japan and Singapore. In January 2014, International Flavors & Fragrances Inc. completed the acquisition of Aromor Flavors and Fragrances Ltd.
IFF Chart

IFF data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $100.87
MG Value $85.81
MG Opinion Overvalued
Value Based on 3% Growth $59.02
Value Based on 0% Growth $34.60
Market Implied Growth Rate 8.14%
NCAV -$1.95
PEmg 24.78
Current Ratio 3.51
PB Ratio 5.12

Balance Sheet – 6/30/2014

Current Assets $1,644,000,000
Current Liabilities $468,700,000
Total Debt $932,600,000
Total Assets $3,400,500,000
Intangible Assets $755,700,000
Total Liabilities $1,802,200,000
Outstanding Shares 81,180,000

Earnings Per Share

2014 (estimate) $4.92
2013 $4.32
2012 $3.11
2011 $3.28
2010 $3.28
2009 $2.47
2008 $2.87
2007 $2.82
2006 $2.48
2005 $2.04
2004 $2.05

Earnings Per Share – ModernGraham

2014 (estimate) $4.07
2013 $3.53
2012 $3.09
2011 $3.03
2010 $2.87
2009 $2.62

Dividend History
IFF Dividend Chart

IFF Dividend data by YCharts


International Flavors & Fragrances satisfies the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned with the high PEmg and PB ratios.  The Enterprising Investor has no initial concerns. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.87 in 2010 to an estimated $4.07 for 2014.  This level of demonstrated growth does not support the market’s implied estimate of 8.14% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

Be sure to check out the previous ModernGraham valuations of International Flavors & Fragrances (IFF) for more perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on International Flavors & Fragrances (IFF)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in International Flavors & Fragrances (IFF) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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