Thursday, April 23, 2020

An AIM Small Cap holding: Sensient Technologies Corp (SXT, $40.89): “Unflavorable Performance” by: John Nick, AIM student at Marquette University. Probably past its peak.

Sensient Technologies Corp (SXT, $40.89): “Unflavorable Performance”
By: John Nick, AIM Student at Marquette University

Sensient Technologies - Wikipedia

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) engages in the manufacture of colors, flavors, and fragrances. It operates through the following segments: Flavors and Fragrances Group; Color Group; and Asia Pacific Group segments.
• Since its restructuring initiative in the mid 20-teens, SXT hasn’t been able to see the marginal growth it was expecting.
• SXT has struggled to continue top-line growth across its historically successful product lines.
• Sensient is attempting to revert to its old ways by shedding unnecessary operations in an effort to increase overall profitability.
• GlobeNatural has proved a successful acquisition as end markets demand more natural alternatives to food coloring/flavoring.

Key points: When Sensient was pitched into our portfolio, they had recently undergone a 3-year restructuring plan that was put into place in February of 2014 and lasted until September of 2017. Throughout this process, SXT decided to eliminate the product lines of their business that were underperforming in order to focus their time and resources on their successful product offerings. They were successful in achieving this initiative and the optimism they received from the investment community was well-warranted. They were a successfully reborn company that had just shed a lot of fat and were ready to leverage their superior product lines in order to achieve substantial EBITDA growth and overall value. Unfortunately, little did we know, their reborn company was already at its peak.
Sensient Technologies Corporation (SXT) has struggled to further expand top and bottom line growth in recent years. Their cosmetic colors and ingredients product line has been struggling (Down more than 10% in 2019) and is typically one of the strongest performers in Sensient diverse product portfolio. During Sensient’s 2019 Q4 earnings call, CEO Paul Manning, declared that this decrease in cosmetics, as well as the decrease in their strongest product line, “Flavors” are attributed to a “Change in consumer taste.” Unfortunately, I do not think COVID-19 is going to change consumer tastes for the better and I am concerned about SXT’s Sales growth.

For the most part, Sensient has not been able to drive further grow since the restructuring process from 2014-2017. Instead of stretching the capabilities of their successful products, they seem to be reopening a page out of their old handbook by pursuing further elimination of weaker products. In October of 2019, Sensient announced their intent to divest its inks, fragrances (excluding its essential oils product line), and fruit preparation product lines. They have since announced that the inks and fragrances product lines are up for sale and are currently working to make the fruit preparation product line available for sale. This process has cost the company millions in impairment charges and additional uncertainty of when they will be able to sell these products, especially during the COVID-19 pandemic.

However, there is a ray of sunshine breaking through the dark cloud that hovers over Sensient; their natural food coloring product line has shown promising growth since the acquisition of GlobeNatural in February of 2018. Although this product line is overshadowed by weak performance in Flavors and Fragrances as they all share a segment, when it comes to positive catalysts for Sensient Technologies, beggars cannot be choosers.

What has the stock done lately? As you may have guessed, 2020 has been a difficult year for SXT ( -38% YTD), however, this is merely a marginal decrease of 9% compared to the Russel 2000 that is down nearly 29%. Recently, other than a constant decrease in price due to estimate revisions, SXT shares received a detrimental increase in trading volume in late March 2020 when the company announced Hank Brown’s, the former Head of Sensient’s Board of Directors, retirement.

Past Year Performance: SXT has decreased slightly over 40% in total value over the last year. Although those numbers are unfavorable, most of this decrease is attributable to the previously mentioned 38%, which was the result of the 2020 market performance (SXT remained in the $65-$75 range for most of 2019). The most notable price change in the last year, prior to FY 2020, was the outcome of the announcement in October of the divesture of three of its product lines. This led to a price decrease of 9%.

Source: Factset

My Takeaway
Sensient Technologies seems to be a company that has hit a stalemate. SXT had a mission in 2014 which consisted of them seriously restructuring operations. They attempted to implement a grand new plan that would both save costs and increase future sales. Unfortunately, though, once they reached their destination, much like a dog chasing a car, they had no idea what to do with themselves. At the time Sensient was pitched, there was a lot of optimism following their comeback, which included the acquisition of GlobeNatural and their newly discovered ability to grow margins through cost restructuring. Even in hindsight, part of the hope was sanctioned, as GlobeNatural has provided strong growth and has a promising future. Unfortunately, much to our dismay as an investor, Sensient has not been able to organically harvest growth since its restructuring during the middle of the past decade. Although I try to remain optimistic, the distasteful outcomes are coloring my opinions against hoping that Sensient’s peak is anywhere but in the past.

Source: Factset