International Flavors and Fragrances Earnings: Specialty Business Largely Returns to Growth

International Flavors and Fragrances’ IFF third-quarter earnings exemplified our thesis on the stock. In the near term, IFF’s specialty businesses, which generated around 75% of revenue in 2022, continued to recover from customer inventory destocking and cost inflation that have weighed on results over the past 18 months. Flavors, fragrances, and health and biosciences, IFF’s three highest-quality businesses, all generated growth on both a sequential and year-over-year basis. This is in line with our view that the impact on IFF’s profits of inflation and volume declines due to customer inventory destocking would prove temporary. We expect a further recovery in these businesses in the fourth quarter and into 2024.

With our outlook largely unchanged, we maintain our $130 per share fair value estimate on IFF. Our wide moat rating is also unchanged. IFF shares rallied and were up 4% at the time of writing on the solid specialty ingredients results and on management’s guidance for adjusted EBITDA to come in at the upper half of the previous range.

At current prices, we view IFF shares as materially undervalued, with the stock trading in 5-star territory and at more than 40% below our fair value estimate. Shares trade just below our downside scenario, which assumes roughly flat revenue from 2023 levels and little margin recovery leading to midcycle profit margins in the high single digits, well below the mid- to high-teens levels IFF has historically generated. Accordingly, we think a lot of the bad news is priced into shares.