Getting Flavorful With This Bullpen Addition
We like the business transformation underway at this company, but the key remains oil and input costs.
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We are adding the shares of International Flavors & Fragrance (IFF) to the Portfolio’s Bullpen.
As its name suggests, the company is well entrenched in the flavors and fragrance markets, but the management has been working to focus on taste, scent and health and biosciences. As such, a few months ago, the company has agreed to sell its Food Ingredients business to CVC Partners for $4.3 billion plus a 10% minority stake in the business. That transaction is expected to close mid-2027 and fetch about $3.8 billion in net cash proceeds that have been earmarked to pay down debt and fund future share repurchases.Â
Then in June, IFF management announced a definitive agreement to divest the company’s portfolio of non-strategic botanical extracts, vitamins and minerals and food enhancement products which are primarily included in the health and biosciences and taste segments. That’s expected to fetch around $75 million.
That combination points to below the operating improvement for IFF in 2027 while also lifting operating margin prospects for the new IFF. The math behind that is the gross margin for the existing business was about 36% while for the new ongoing company those margins are around 42%. Also, the remaining operations are less R&D intensive.Â
That’s an interesting proposition, but what is arguably more interesting is what would happen when we see a sustained drop in oil prices. Reason being, while IFF uses a variety of raw materials across its three reporting segments (Taste, Health & Biosciences, and Scent), the profitability at its Scent business has been impacted by the climb in oil prices. Synthetic products in the Scent business are created by combining petroleum-based ingredients with natural ones.
It’s important because while Taste, Health & Biosciences, and Scent business are roughly equal when it comes to revenue contribution, Scent is the company second most profitable segment behind Health & Biosciences.
While oil prices are down on Monday amid renewed peace talk chatter between the U.S. and Iran, they are still up significantly compared to year-ago levels. But then again, that’s the potential opportunity if a lasting agreement is put in place and supply disruptions fade.
If that comes to pass, paired with the change in business mix and below the operating line developments discussed above, the odds of the consensus EPS figure of $3.93 being hit next year go up. However, we’ll still need to move past year over year EPS declines expected for Q3 2026 and the current one.
That along with the melt up we’ve seen in the shares during October suggests there could be some downside risk when IFF reports Q3 2026 results later this week. Last week, fellow flavorings company Sensient (SXT) saw its shares tumble following mixed Q3 2026 results and reiterated guidance for this year. Â
For now, we’ll put IFF shares in the Portfolio’s Bullpen and track developments on the petrochemical front. We’ll also be a fly on the wall for the company’s Q3 2026 earnings call later this week.
