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.
Summary
•
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
