Most people don't think about where the lavender smell in their shampoo comes from. Or who invented that smoky bar-b-que taste in their potato chips. And they'd probably be surprised that the tastes and smells they encounter multiple times every day are made by the same companies.
Additionally, most investors don't recognize what flavors and fragrances (F&F, for short) companies can bring to their portfolio. Think of it this way: Everything from the smell of the french fries at McDonald's
Diverse customers and markets
In short, the F&F industry supplies ingredients for a massive amount of products -- packaged food, personal care items, household cleaners, laundry detergents, chewing gum, beverages, and cologne -- bought by nearly every consumer in the world. F&F companies compete for business from a broad range of corporate customers, including Procter & Gamble
As basic investment thesis, the sheer reach and breadth of these organizations means that they provide investors with "shotgun" exposure to worldwide consumer growth. This diversity offers both potential and protection. For instance, a category-by-category look at the 2009 sales growth (excluding the impact of foreign exchange) for International Flavors and Fragrances
|
Region |
Fine & Beauty |
Fragrance Total* |
Flavors Total |
IFF Total |
|---|---|---|---|---|
|
North America |
-14% |
-3% |
3% |
0% |
|
EAME |
-18% |
-8% |
0% |
-5% |
|
Latin America |
9% |
5% |
4% |
5% |
|
Greater Asia |
20% |
13% |
4% |
7% |
|
IFF Total |
-8% |
-1% |
2% |
0% |
*Includes Fine and Beauty.
As you can see, the sales of perfumes and other luxury products (in Fine & Beauty) cratered in developed markets, but showed excellent growth in emerging ones. Products like hair and home care held up better, buoying total fragrance sales. Flavor sales remained steady, providing a consistent base of recurring revenue from packaged food products. As I wrote here, the emergence of new middle-class consumers will power F&F companies in the coming decades.
Looking at the competition
In addition to providing exposure to emerging consumers, IFF companies' steady cash flows offer decent dividends as well, as seen below:
|
Company |
2009 Sales (in billions) |
Approximate F&F Market Share* |
P/E Ratio |
Dividend |
|---|---|---|---|---|
|
Givaudan |
$3.8 |
19% |
37.1 |
2.2% |
|
International Flavors & Fragrances |
$2.3 |
12% |
18.4 |
2.2% |
|
Firmenich |
$2.3** |
12% |
N/A |
N/A |
|
Symrise |
$1.9 |
10% |
26.7 |
3% |
*According to Symrise 2009 annual report.
**Approximated based on Symrise 2009 annual report market share figure.
IFF is one of four major players in the industry, three of which are public. The largest, Switzerland's Givaudan, grabbed market share when it acquired Quest in 2007, a move the company is still digesting. In second place is Firmenich, a private, family-run firm that competes on the strength of long-term relationships. Also vying for the No. 2 spot is IFF, which is still finding its way after recent reorganizations and a newly appointed CEO. And Germany's Symrise is a fast-growing firm that carves its niche by focusing on regional contracts and lower-level brands.
In addition to being the largest, Givaudan's 20.7% EBIDTA margin leads the three public players, with Symrise and IFF both in the mid-to-high teens. Givaudan expects to increase its profitability, with detailed plans to increase margins by 200 basis points in 2010. Symrise has similarly big plans, publicly stating that it would improve EBITDA margins to better than 20% in 2010 and soon catch IFF as the No. 3 player in the industry. (Rumors swirl that IFF may try to acquire its smaller rival first.)
The leader of the pack
Though it's traded on foreign exchanges, I consider Givaudan the most attractive investment option. In addition to being the most profitable, Givaudan's management is considered top-notch, and it does an excellent job of explaining its strategies and internal mechanics. Investors looking for further details can tune into the annual investor presentation in late March.
Givaudan may be the cream of the F&F crop, but at this point, it's no bargain. In fact, all three public F&F firms are trading close to their 52-week highs, and all have returned to their pre-recession prices. Investors looking for a safe and steady way to gain exposure to worldwide consumer trends should keep an eye on all three companies for future buying opportunities and higher dividend yields.
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