Sensient Technologies: Pretty Colors, Nice Smells -- And Earnings Growth

| About: Sensient Technologies (SXT)

Sensient Technologies (NYSE: SXT) is a purveyor of good taste. The company, which primarily does business through Sensient Colors and Sensient Dehydrated Flavors, makes flavors, aromas, and colors for food, pharmaceutical, cosmetics, and household products. Sensient also makes inks for ink jet printers and chemicals for laser printing and flat-screen displays.

In 2001 the company sold its Red Star Yeast and Products unit to Paris-based Lesaffre, a producer of yeast and yeast extracts. Sensient, has operations in 30 countries and customers worldwide, including food processors, pharmaceutical companies, and personal-care and household-products manufacturers. More than half of its revenue is generated outside the US.  Diversity of products, a turnaround in profits and a decent yield, all make SXT an interesting stock to consider. 

The stock price hasn't done too much in the last 10 years, trading within a rather narrow range of $16 a share to $28 a share (all numbers have been split adjusted for a 2 for 1 split in 1998).  And that could be it's most attractive feature.  Many investors are looking for capital preservation as well as some growth and income.  This stock has the income (a yield of 2.8% is better than most dividends), but it's the growth that has been a little weak.  Is that about to change?

Earnings are expected to improve noticeably this year, ending a difficult three-year stretch where they went from $1.66 to $1.62 to $1.21.  This year look for $1.42 and next year $1.52.  While not a big jump is anticipated for next year, the trend is certainly in the right direction.  Analysts are looking for sales to improve, on average, 8% a year over the next 5 years and earnings to grow by 11% a year, on average, in the same time frame.

That 17% improvement in eps this year over last should come from stringent cost-cutting the company has in place.  Management has been closing plants and laying off workers and should save about $10 million this year.  After taxes, that will account for  about 15 cents of the improvement in eps.  Another contributor: The Flavors and Fragrances Group with higher revenues and profits.  It's operating profit is up to $77 million for the first 9 months of this year.  That's an increase in profits of 22% on a sales gain of 9% to $548 million.  This division has seen cost-cutting as well as benefited from higher pricing and improved product mix.

Sensient makes something that most food processors and beverage companies need: flavors and colors.  In order to extend existing brands and make new ones, these companies rely on both.  However, like any company without a monopoly, SXT has competition, offering lower priced flavors and colors.  That may not be as big a concern as usually thought since companies look to differentiate their products with unique colors and/or flavors which requires a noncommodity type flavor or color.  And those are SXT's strong points.  That also means price increases may be able to stick as demand increases.

As for valuation, the company's p/e is at a relatively high 20.  The company's annual p/e has stayed within the12.7 to 16.5 levels for the last 15 years.  Obviously, investors are expecting those better earnings to be delivered over the next 2 years.  If they aren't this stock could easily find its way back toward $16 a share.

This company has turned the corner as far as earnings are concerned.  Cost-cutting, new products and better pricing have all contributed.  The stock has responded to these positive steps and now trades at a fairly rich p/e.  If the earnings come in at $1.42, this year, that p/e will come down dramatically, to 16.3, based on a $23 price.  That's still near the top of the p/e range for the stock.  Of course, the dividend is healthy and relatively safe, taking only 42% of earnings to pay. 

As always, there's some good and some bad with this stock, with the good seeming to outnumber the bad, at least for the moment.  But when much of the increased earnings come from cost-cutting, remember that there's only so much cutting you can do.  Then sales and operating profits have to kick in for continued earnings growth.

Disclosure: Author has no position in SXT

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