DRIP PORTFOLIO

The Drip Portfolio
Sweet Smell of Success?
International Flavors & Fragrances

By Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA (Oct. 14, 1999) -- Your vote on the message board leaned strongly towards "nay" on Heinz (NYSE: HNZ). You're saying, "Nay, do not consider Heinz any longer." I agree. As respectable as the company may be, it doesn't meet most of our investment criteria.

As for Heinz's valuation: it isn't priced particularly steep, but it isn't a screaming bargain, either. The stock appears inexpensive to me only when compared to very expensive peers. Either way, it was voted nay.

Three companies remain for study on our food and beverage list: International Flavors & Fragrances (NYSE: IFF), Brown-Forman (NYSE: BF.A) and Philip Morris (NYSE: MO). As you probably surmised from our headline, today we begin to look at -- or sniff around -- International Flavors and Fragrances.

In our first infamous food and beverage study of 1997 and 1998, we didn't consider this company. We felt that IFF was less of a food and beverage concern, and more of a chemical and additive firm. However, IFF is very much involved in the food industry, and it deals in products similar to at least one other company gracing our current food study. In fact, IFF competes with Wrigley (NYSE: WWY).

Time for the nitty gritty.

International Flavors and Fragrances (NYSE: IFF)


Company Description: International Flavors & Fragrances Inc. is a creator of flavor and fragrance products used by food and consumer good manufacturers to flavor or add fragrance to products. IFF markets primarily to food makers, cosmetics manufacturers and personal care product makers. Last year, 66% of sales at this interesting operation took place outside the United States.

IFF's flavors are sold to manufacturers of prepared foods, dairy products, beverages, confectionery products, pharmaceuticals and more. IFF's fragrance customers include producers of perfumes, cosmetics, soaps, deodorants, detergents, hair care products and others -- really, any item that Brian rarely uses. The company's fragrances account for about 60% of sales.

Major Product Uses: From SEC filings and from Hoover's, IFF's fragrance uses include air fresheners, after-shave lotions, colognes, cosmetic creams, deodorants, detergents, laundry soaps, lipsticks, lotions, perfumes, powders, soaps and other items. Its flavor uses -- and this is obviously where we get into the "food and beverage" category -- include alcoholic beverages, animal foods, bakery items, candy, convenience foods, dairy, desserts, diet foods, drink powders, marinades, pharmaceuticals (okay, not a food), soft drinks and more.

Major Competitors: Competitors include BASF AG, Bayer AG, McCormick, Elf Aquitaine, Roche Holding, Unilever, Henkel and Wrigley.

Valuation, Growth, and Share Performance:
At $36 per share, International Flavor's market cap is $3.82 billion (found when share price is multiplied by its 106 million shares outstanding). With annualized sales for the fiscal year of $1.47 billion, the company trades at 2.59 times sales, which is the market cap divided by trailing sales.

As of the end of the last quarter, IFF had $87.1 million in cash and equivalents and only $3.6 million in long-term debt. Therefore, the enterprise value of International Flavors is $3.96 billion -- a modest difference from its market cap. (Enterprise value was described in a past report.) The enterprise value-to-sales ratio is 2.69. On the earnings per share side, International Flavors trades at 23.6 times trailing 12-month earnings per share. The stock is at 20.1 times this year's consensus earning estimate, and 18.6 times fiscal 2000 estimates.

Margins Reviewed: In 1998, IFF had a 45.7% gross margin and a 23.8% operating margin. This compares to our other companies as follows:

                KO      PEP     WWY     HNZ     IFF
Gross Margin    70.4%   57.3%   57.7%   36.1%   45.7%
Oper. Margin    26.4%   12.9%   20.6%   11.7%   23.8%
IFF's gross margin performance is lower than our three finalists, but its operating margin topped Pepsi and Wrigley. It beats our smushed tomato concern, Heinz, on both counts.

Leverage Reviewed: Other than Wrigley, which carries zero long-term debt, International Flavors is in the best shape of our contenders when it comes to debt. And with $87 million in the bank, IFF has enough cash to fund growth, acquisitions, share buy backs, and dividend increases.

Capital Allocation: Last quarter the company increased its dividend payment, which can be expected to continue annually. The dividend yield is currently an impressive 4.2%. No major investments appear to be on tap now, other than -- ta da -- a restructuring.

Outlook and Summary: In June, IFF announced details of a program to streamline the company's operations worldwide. Management expects that the program will result in improved operating efficiencies and asset utilization, which will enable significant cost savings and enhance profitability. Much like the programs at other food giants, IFF's plans include the closure of selected manufacturing, distribution and sales facilities in all geographic areas in which the company operates. In addition, IFF will further consolidate and align production in its remaining manufacturing locations. The program will result in a reduction in the company's global workforce of nearly 5%, or 200 employees.

Given slow growth the past five years due largely to international woes, IFF has the potential to surprise to the upside on a rebound. The company is in a strong competitive position and the stock's valuation, at 18.6 times five quarter-ahead estimates while sporting a 4.2% dividend yield, is initially at least somewhat interesting. We'll continue our study.

Please click here for the Snapshot for IFF and for much more information. To discuss the company, please visit the Drip Companies message board.

--Jeff Fischer, TMF Jeff on the boards.

Drip Portfolio

10/14/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP13/16$40.69
INTCINTEL CORP7/32$73.34
JNJJOHNSON & JOHNSON-11/16$94.63
MELMELLON BANK CORP-1/8$32.81

  Day Week Month Year
To Date
Since
7/28/97
Annualized
Drip .60% -4.11% -.01% 8.41% 23.29% 9.92%
S&P 500 -.17% -3.94% .06% 4.41% 36.71% 15.16%
S&P 500(DA) -.17% -3.94% .06% 4.99% 39.33% 16.16%
S&P 500(DCA) n/a n/a n/a n/a 17.17% 7.42%
NASDAQ .20% -2.76% 2.21% 28.01% 78.83% 30.01%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/9721.0839INTC42.592$73.3472.20%
11/14/9710.215JNJ78.341$94.6320.79%
11/5/9825.5267MEL34.137$32.81-3.88%
4/13/988.174CPB54.586$40.69-25.46%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/9721.0839INTC$898.01$1,546.37$648.36
11/14/9710.215JNJ$800.25$966.59$166.34
11/5/9825.5267MEL$871.40$837.59($33.81)
4/13/988.174CPB$446.18$332.58($113.60)
  Cash: $24.37  
  Total: $3,707.51  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.