International Flavors & Fragrances Inc. (NYSE:IFF) is one of the oldest and largest specialty chemical producers in the world. The New-York based company was founded in 1909 and primarily operates in flavor and fragrance segments. The fragrance segment offers personal care products such as fragrances, perfumes, colognes, and toiletries. The flavor segment provides flavors that are used by industrial food and beverage producers.
As of Sep 9th, International Flavors & Fragrances was trading at $56 with a 52-week range of $46.54 – $66.29. It has a market cap of $4.4 billion. Trailing twelve month P/E ratio is 15.5, and forward P/E ratio is 12.6. P/B, P/S, and P/CF ratios stand at 3.7, 1.6, and 23.5, respectively. The 3-year annualized revenue and EPS growth stand at 4.8% and 5%, respectively. Operating margin is 16.7%, and net profit margin is 10.7%. The company has a debt-to-equity ratio of 0.7. IFF has a projected yield of 2.2% for its shareholders.
International Flavors & Fragrances has a 3-star rating from Morningstar. While its trailing P/E ratio is 15.5, it has a 5-year average P/E ratio of 16.2. Out of 13 analysts covering the company, 7 have buy, 2 have outperform, and 4 have hold ratings. Wall Street has diverse opinions on IFF's future. The bottom line is 3.6% growth, whereas the top-line growth estimate is 16% for the next year. Average five-year annualized growth forecast estimate is 8%.
What is the fair value of International Flavors & Fragrances given the forecast estimates? In this article, the 29th in the series, I will show a step-by-step calculation of IFF's fair value using discounted earnings plus equity model.
Discounted Earnings Plus Equity Model
This model is primarily used for estimating the returns from long-term projects. It is also frequently used to price fair-valued IPOs. The methodology is based on discounting the present value of the future earnings to the current period:
V = E_{0} + E_{1}_{ }/(1+r) + E_{2}_{ }/(1+r)^{2} + E_{3}/(1+r)^{3} + E_{4}/(1+r)^{4} + E_{5}/(1+r)^{5}^{ }+ Disposal Value
V = E_{0} + E_{0}_{ }(1+g)/(1+r) + E_{0}(1+g)^{2}/(1+r)^{2} + … + E_{0}(1+g)^{5}/(1+r)^{5} + E_{0}(1+g)^{5}/[r(1+r)^{5}]
The earnings after the last period act as a perpetuity that creates regular earnings:
Disposal Value = D = E_{0}(1+g)^{5}/[r(1+r)^{5}] = E_{5} / r
While this formula might look scary for many of us, it easily calculates the fair value of a stock. All we need is the current-period earnings, earnings growth estimate, and the discount rate. To be as objective as possible, I use Morningstar data for my estimates. You can set these parameters as you wish, according to your own diligence.
International Flavor & Fragrance's Valuation
Historically, the average return of the DJI has been around 11% (including dividends). Therefore, I will use 11% as my discount rate. Since we are in the middle of the year, it will be more feasible to take the average of ttm EPS of $3.62 along with the mean estimate of $4.30 for the next year.
E_{0}_{ }= EPS = ($3.62 + $4.30) / 2 = $3.96
Wall Street holds diversified opinions on International Flavors & Fragrances’ future. While analysts tend to impose subjective opinions on their estimates, the average analyst estimate is a good starting point. Average five-year growth forecast is 8%. Book value per share is $14.65.
The rest is as follows:
Fair Value Estimator | ||
V0 | E_{0 } | $3.96 |
V1 | E_{0 }(1+g)/(1+r) | $3.85 |
V2 | E_{0}((1+g)/(1+r))^{2} | $3.75 |
V3 | E_{0}((1+g)/(1+r))^{3} | $3.65 |
V4 | E_{0}((1+g)/(1+r))^{4} | $3.55 |
V5 | E_{0}((1+g)/(1+r))^{5} | $3.45 |
D | E_{0}(1+g)^{5}/[r(1+r)^{5}] | $31.39 |
BV | Equals | $14.65 |
Fair Value Range | Lower Boundary | $53.60 |
Upper Boundary | $68.25 | |
Potential | 21.75% |
I decided to add the book value per share so that we can distinguish between a low-debt and debt-loaded company. The lower boundary does not include the book value. According to my 5 year discounted-earnings-plus-book-value model, the fair-value range for International Flavors & Fragrances is between $53.60 and $68.25 per share.
As of Sep 9th, International Flavors & Fragrances was trading at a price of $56. I like International Flavors & Fragrances as a company. The company has diversified and enjoyable products. I see a continuous growth potential, as well. The market seems to fairly-price International Flavors & Fragrances’ growth potential. The current price of $56 indicates that the stock is fairly-valued. Based on my FED+ fair value estimate, International Flavors & Fragrances is within the lower-end of my fair-value range. The stock has 21.75% upside potential to reach the upper boundary of its fair value range.
[Click to enlarge]
Summary
International Flavors & Fragrances is one of the oldest companies in the U.S. I have been told by Seeking Alpha reader Mr. Akdoruk, that the stock is particularly popular among baby boomers and retirees. The company has an A-rating from Morningstar in terms of profitability and financial health.
Average P/E ratio in the last 5 years was 16.2. It is trading with a P/E ratio of 15.9, and forward P/E ratio of 12.6. Net profit margin of 10.7%, and Return on Equity of 28.9% are significantly above the market average. International Flavors & Fragrances offered 2.2% dividend yield last year. In the last 5 years annualized EPS growth was 9.98%. The company has significant exposure to emerging markets. With a market cap of $4.4 billion, I expect the growth to keep its pace.
As of Sep 9th, International Flavors & Fragrances was trading at $56, within my fair-value range of $53.60 and $68.25. The stock has a relatively high PEG ratio of 2.25. Its price to book ratio of 3.8 is above the market. The stock has a debt/equity ratio of 0.7 and Beta of 0.92. IFF has 21.75% upside potential to reach the upper boundary of its fair value estimate based on 8% EPS growth estimate. Analysts also agree with me. Their mean target price is $69. RBC Capital has an outperform rating with a target price of $71. I think IFF is a slow, but steady mover.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.