Awhile back, I found myself working for a client and inside the super-duper-ultra-secret headquarters of one of the world’s largest flavor and fragrance houses, International Flavors and Fragrances (IFF).
The reason flavors and fragrances are so secret is because it takes a lot of expensive research to come up with flavors and fragrances, the competition is fierce, and fragrances can often have very short shelf lives.
I sometimes regard certain fragrances, like Carlos Benhaim’s legendary Polo by Ralph Lauren, to be a bit like a blockbuster pharmaceutical out of Merck (MRK) or Pfizer (PFE) — not because it’s fragrances are drugs, but because so few become true monster hits with the public.
Flavors and fragrances are absolutely essential to our daily lives. Our sense of smell is directly linked to our sense of taste, so that’s why they often are combined under one roof. Finding the exact perfect flavor or fragrance is a combination of true artistry, science and experimentation. That’s why the world’s master perfumers are few and far between, and have often been practicing for well more than 30 years.
Because IFF stock provides essential ingredients for essential products — many of which are considered consumer staples — I regard the company as an important “infrastructure” play. This is analogous to companies like Genuine Parts (GPC), which provides parts for all kind of industrial uses. The notion is that industry cannot survive unless somebody manufactures original and replacement parts. It’s just like oil service stocks, such as Kinder Morgan Partners (KMP), which provides pipelines and storage tanks for energy. Oil and natural gas are useless unless they can be transported.
So your favorite foods with all those unique flavors, and all those household cleaning supplies that smell so good, and of course, all those perfumes and colognes that make you feel good have to be produced by someone. That’s where companies like IFF come in. Believe or not, the company has been around since 1833.
IFF stock first showed up on my radar two years ago when it was at $60. Now it’s at $99, and I’m kicking myself for not buying in. Last month, the company reported a 20% increase in EPS on a 4.1% YOY increase in revenue, most of which came on a 7.6% increase in fragrance revenue.
The balance sheet is in great shape, with $327 million in cash offset by $933 million in debt, on which it pays only $46 million in interest. So its debt is costing a mere 5% annually. IFF has something all investors should love — cash flow alongside consistent capex (about $130 million annually).
The company has been roaring on the operating side the past three years, with operating cash flow rising from $189 million in 2011, to $324 million in 2012, to $408 million last year. Through the first half of the year, IFF stock generated $154 million in operating cash vs. $118 million last year.
Best of all, IFF stock is now paying a much bigger dividend. It put out $63.4 million in the first six months of the year — more than double the $27.7 million it did last year. That puts the yield at 1.5% — not quite high enough to attract income investors, but if IFF stock keeps raising the dividend, that may change.
At 22x this year’s earnings, and 18x next year’s earnings, and a long-term earnings growth estimate of 11%, the stock is wee bit pricey for value investors. However, IFF stock is unquestionably deserving of a premium for its cash flow, its long history, and its importance to our daily lives. I think investors interested in a Peter Lynch stalwart could do well with IFF.
A quick note on competition: It exists, but the companies aren’t public. All others are either privately-held, or are divisions of larger consumer product corporations.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.