Sensient
Technologies Corp (SXT, $40.89): “Unflavorable Performance”
By:
John Nick, 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) 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
