Sunday, May 6, 2018

A current AIM Program Small Cap Equity Holding: Sensient Technologies Corporation (SXT) by: Elizabeth Wolfe. "Flavor-able Future Ahead"

Sensient Technologies Corporation (SXT, $70.09): “Flavor-able Future Ahead”

By: Elizabeth Wolfe, AIM student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Sensient Technologies Corp. (NYSE: SXT) manufactures and markets many of the colors, flavors, and fragrances we find in food, beverages, and personal care items.   

  This company operates internationally, however over 50% of their revenue comes from the Americas.

• SXT recently acquired a Natural Color business from GlobeNatrual in March 2018. This acquisition provides significant production capacity and expands the product portfolio.

• The company is looking to move toward more sustainable and socially responsible sourcing with their “seed to shelf” initiative.

  SXT is on track to increase their Net Income by over 40% despite the decrease of faith from the market.

Key points: In 2017, SXT's segment Flavor & Fragrance saw a period of restructuring and their Color segment saw solid performance. However, the company did face higher than expected costs when going through the restructuring. Management stated they expect Flavor & Fragrance to turn around in 2018 and produce growth in revenues. They also do not expect to face restructuring costs from this point on. Now that SXT's restructuring is finished the company expects to turn its time and attention to making more acquisitions. Management expects to add several acquisitions in 2018 and be positively impacted by inorganic growth as well as add diversification to its current offerings. SXT is on track for solid performance in 2018.
SXT like many other companies, experienced a decrease in earnings due to a change in U.S. tax law. This change reduced Q4 earnings by $18.4 million. Around $7 million of this decrease is from toll charge on the repatriation of foreign earnings, and the remaining amount is a one-time deduction from deferred tax assets with the new law put in place. However, going forward, SXT will be positively impacted by the lower tax rate. SXT also had a significant acquisition in 2017 that helped move them closer to their goals of a vertically integrated supply chain.

SXT has recently implemented a "seed to shelf" platform. This initiative takes the stance that consumers should be able to trace the origins of their food and businesses should be stressing transparency. As the world turns more to healthy living this platform will work to SXT’s favor. Seed to Shelf is just one piece of SXT’s larger initiative where they are committed to sustainability and socially responsible sourcing. Their commitment has four key areas focused on better performance; agricultural R&D, seed breeding, seed production, and plantation. SXT hopes this will allow for greater transparency throughout their business.    

What has the stock done lately?

This time last month SXT was trading at $74.75 and now they are trading at $70.09. Over the past month the stock has seen a steady decrease in price. Following the announcement of their recent acquisition the stock price surprisingly continued to drop despite this being a strategic move for the company. In the past week, however, the stock price seems to have turned around and has continually increased.

Past Year Performance: Today, the stock is trading at almost $10 less than it was this time last year and is down ~12%. The stock peaked at $83.35 on April 26th, 2017 and hit a low of $67.56 on March 23rd, 2018, showing a volatile stock price. This past year’s decrease has been out of character for the company because over the past 3 years it has consistently increased. Given this, SXT may need to refocus their flavors.      

Source: FactSet

My Takeaway

Mid-to-late 2017 took a toll on SXT however, I think this company has an opportunity to bring itself back to where it should be compared to the market. As SXT moves more into the health and wellness side of their business I think they will see increased growth. Based off of guidance from management at the beginning of 2018, SXT stays at a "buy" but time will tell if their recent acquisitions is going to play out like they hoped.    

Source: FactSet