3 Reasons IFF is Risky and 1 Stock to Buy Instead

International Flavors & Fragrances’s 21.6% return over the past six months has outpaced the S&P 500 by 15.1%, and its stock price has climbed to $79.94 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy International Flavors & Fragrances, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think International Flavors & Fragrances Will Underperform?

Despite the momentum, we're sitting this one out for now. Here are three reasons why IFF doesn't excite us and a stock we'd rather own.

1. Slow Organic Growth Suggests Waning Demand In Core Business

When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.

The demand for International Flavors & Fragrances’s products has generally risen over the last two years but lagged behind the broader sector. On average, the company’s organic sales have grown by 4.5% year on year.

2. Shrinking Operating Margin

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Looking at the trend in its profitability, International Flavors & Fragrances’s operating margin decreased by 10.2 percentage points over the last year. International Flavors & Fragrances’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 3.5%.

3. Previous Growth Initiatives Have Lost Money

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

International Flavors & Fragrances’s five-year average ROIC was negative 2.5%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer staples sector.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of International Flavors & Fragrances, we’ll be cheering from the sidelines. With its shares topping the market in recent months, the stock trades at 18.7× forward P/E (or $79.94 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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