Givaudan's Quality Still Tastes Good
Givaudan is on a chemical high.
Shares in the Swiss maker of flavors and fragrances are valued at more than 19 times earnings, well ahead of the European chemical sector in the midteens.
Even at this level, though, investors shouldn't turn up their noses.
Givaudan arguably has more in common with its customers—consumer-goods and food makers such as Unilever, Nestlé or L'Oréal—than with traditional chemical companies. Its customers benefit from increasing demand in emerging markets for packaged food or household products. Like Givaudan, which makes about 45% of sales in emerging markets, they trade close to 20 times earnings, well above average valuations over the past five years.
And worries about ailing sales in emerging markets seem to be fading. Excluding currency fluctuations, Givaudan's sales rose 5.7% in the first quarter, it said Friday, above target. Developing-market revenue increased close to 10%.
Givaudan leads a sector dominated by four companies, with a 25% market share. In emerging markets, where it sells to multinational consumer groups as well as homegrown champions, its market share is higher still. Givaudan has one-third of the African flavoring market, for example.
Givaudan also can offer investors consistency and cash. The company has posted annual sales growth of 5.5% since 2008; its margin on earnings before interest, taxes, depreciation and amortization has stayed in a narrow range between 19% and 23% since 2000.
Given the importance of taste and smell as attributes in end products, the industry has proved adept at passing on price increases in more than 10,000 chemical and natural ingredients to its customers, notes Liberum. Givaudan's profit margin should improve this year from 22.2% in 2013 as cost savings from a new plant in Hungary materialize.
Meanwhile, the Swiss company already has hit its 2015 target to generate free cash flow equivalent to between 14% and 16% of sales. Its pledge to pay out a minimum of 60% to shareholders meant a 30% increase in the dividend last year and a yield of 3.5%, well above smaller rivals. The price may seem heady, but Givaudan should appeal to those with a taste for quality.