International Flavors & Fragrances Earnings: Stock Dives as Commodity Ingredients Turn Sour

International Flavors & Fragrances’, or IFF’s IFF, second quarter shows markedly different results between the company’s specialty ingredients businesses, which generate 75% of total sales, and the commodity functional ingredients business, which generates the remainder. Within specialty ingredients, IFF saw improving sequential profit margins as its strong pricing power, that underpins our wide moat rating, more than offset cost inflation.

However, the commoditized functional ingredients business, which sells plant proteins, texturants, and emulsifiers, saw volumes decline over 20% versus the prior-year quarter. Weakness in the functional ingredients business, which makes up 50% of the Nourish segment, led to Nourish profits falling over 50% versus the prior-year quarter.

Management cut 2023 full-year guidance for the third time in as many quarters. We updated our model to assume the functional ingredients business sees a 20% sales decline in 2023, with only modest growth thereafter. Our forecasts for IFF’s specialty businesses are largely intact, where we continue to forecast profits will rebound as IFF’s pricing power allows the company to fully recover from cost inflation. This dynamic was evident in the company’s scent (fragrances) and pharma solutions businesses, both of which saw margin expansion and double-digit profit growth during the quarter.

Having updated our model to reflect our revised forecast, we lower our IFF fair value estimate to $130 per share from $140. We have also changed our Morningstar Uncertainty Rating to High from Medium to account for a wider range of outcomes in the functional ingredients business.

IFF’s shares plunged on the guidance cut, down 19% at the time of writing. We think the market is deeply skeptical that management will be able to turn around the business. At current prices, we view IFF shares as deeply undervalued with the stock trading at roughly half our base case.