International Flavors & Fragrances: The Sweet Taste (and Smell) of Success

| About: International Flavors (IFF)

International Flavors & Fragrances (NYSE:IFF) June 10, 2008 price: $41.02

52-week range: $38.88 [Jan. 31, 2008] - $54.75 [Oct. 15, 2007]

Dividend = $0.23 quarterly = 2.24% current yield

 

IFF is a leading manufacturer of flavors and fragrances used in the production of consumer products worldwide. End products of their customers include perfumes, soaps, detergents, cosmetics, foods, drugs, toiletries and tobacco related items. Fragrances were about 56% of sales while flavorings provided 44% of 2007 revenues. Non-U.S. sales were 72% last year.

 

This is a very stable and predictable business. Value Line rates IFF above average in safety and notes their 'stock price stability' at the 95th percentile and their 'earnings predictability' at the 85th percentile [with 100 being best]. IFF's Beta is a low 0.85.

 

The dividend has been raised in each of the past five years. The current yield of 2.24% is the highest on these shares since 2001.

 

Earnings have been growing nicely. Each of the past 9 quarters has seen year-over-year increases on a per-share basis and the annual EPS have grown from $1.41 in 2001 to $2.70 during the trailing 12 months. Consensus estimates for 2008 and 2009 are now running about $3.01 and $3.35 respectively.

 

Here are the per-share numbers as reported by Value Line:

 

Year ……...Sales ……....C/F …….....EPS ……...Div ……...Avg. P/E

 

2007 …….$28.10 …..$3.93 …...$2.69 …...$0.88 ……..18.5x

2006 …….$23.43 …..$3.38 …...$2.34 …...$0.74 ……..16.3x

2005 …….$21.97 …..$3.04 …...$1.96 …...$0.72 ……..18.9x

2004 …….$21.52 …..$3.04 …...$2.08 …...$0.67 ……..18.1x

2003 …….$20.23 …..$3.05 …...$2.13 …...$0.62 ……..15.1x

2002 …….$19.20 …..$2.85 …...$1.94 …...$0.60 ……..16.9x

2001 …….$19.46 …..$2.73 …...$1.41 …...$0.60 ……..18.5x

 

IFF's 10-year median P/E has been 18x. Over the seven years just completed it averaged 17.47x.  A return to even 16.5 times 2008 projections of $3.01 leads me to a target price of $49.66 or + 21% from the current quote. Add in the two second half dividend payments and 22% or more seems very possible by year-end.

 

Not too bad on shares that appear to have very conservative characteristics for these very volatile times.

 

Is my $49.66 goal an achievable one? International F & F shares hit 2006 & 2007 highs of $49.90 and $54.80 when fundamentals were not as string as they are today.

 

Here's a low-risk combination play on IFF for investors comfortable with option trading:

 

……………………………………………..cash outlay ……………….cash inflow

Buy 1000 shares IFF @ $41.02 …………… $41,020

Sell 10 IFF Jan. $40 Calls @ $3.40 ………………………………………$3,400

Sell 10 IFF Jan. $40 Puts @ $2.40 ……………………………………….$2,400

Net Cash Outlay……………………………. $35,220

 

 

On expiration date (Jan. 19, 2009) if your shares are still $40 or better (which they already are):

 

Your shares will be called [sold] for $40,000.

You will have collected dividends of $460.

Your puts will expire worthless [a good thing for you as a seller].

You will not own any shares or have any option obligations.

You will have $40,460 in cash.

 

That's a $5,240 return on a net cash outlay of $35,220, or + 14.8% in under 7 ½ months on a stock that did not have to go up at all. In fact, this return is the same even if the shares fall by up to $1.02 or (-2.48%) by expiration date.

 

Disclosure: Author is long IFF shares.