2023-10-24 06:15:33 ET
Summary
- Sensient Technologies reported Q3 earnings highlighted by weak growth and a revision lower to full year guidance.
- Customers continue to destock inventory which has limited demand for new orders.
- We expect shares to remain volatile, lacking a catalyst for growth to rebound.
It's been a tough year for Sensient Technologies Corporation ( SXT ), recognized as a leading manufacturer of colors, flavors, and specialty ingredients within the chemicals industry. Soft sales and lower earnings amid a challenging macro environment have pushed shares down more than -20% this year.
The company just reported its latest quarterly results highlighted by a disappointing revision lower to full-year guidance by management. While SXT benefits from its leadership position and overall solid fundamentals, we expect shares to remain volatile. Even as some end markets show signs of stabilizing, what's missing here is a broader growth rebound.
SXT Earnings Recap
SXT Q3 EPS of $0.75 came in line with market estimates, although still down by -12% from $0.85 in the period last year. Revenue reached $364 million up 0.8% year-over-year, but also a decline of -2% on a local-currency basis considering FX volatility. The setup here considers that despite higher average pricing initiatives by Sensient since last year, volumes are down across all segments. Management explains that end customers have been destocking inventory. This is in the context of what was likely a post-pandemic inventory glut the global industry continues to work through, which has translated into lower new orders.
In terms of revenue, Asia Pacific has been a strong point with local currency revenue up by 4.3% y/y in Q3. This balanced a deeper -8.2% decline in the Color group globally, while Flavors & Extracts were down by 0.5% y/y.
These trends are also reflected in the operating income down by -6.2% y/y in Q3. Similarly, the smoothed adjusted EBITDA at $61.8 million is down by -4% y/y. The volume drop has outweighed some of the margin gains from easing cost pressures that defined 2022.
There is some connection to slowing consumer spending globally covering stables like personal care items including cosmetics, hair care, and skin care formulation inputs. Weaker demand also reflects some headline-making volatility in packaged foods end markets.
We mentioned the revised guidance. The update here is that Sensient management now sees full-year revenue climbing just in the "low single digits", compared to mid-single digits in the prior update. Separately, EPS is now expected to decline in the "low double-digit" range" compared to the high single-digit expectation previously. Simply put, conditions have materialized a bit weaker than previously expected.
The other dynamic at play here is that the company's balance sheet position has been slightly down since the start of the year. Sensient ended the quarter with $652 million in net debt compared to $538 million this time last year. Considering $252 million in adjusted EBITDA over the past year, the net leverage rate at 2.6x has climbed from 2.0x in Q3 2022. Overall, stable but helps explain one of the several headwinds facing the stock.
What's Next For SXT?
What we like about Sensient is its focused profile within this segment of chemicals covering Flavors and Extracts alongside related color solutions. The understanding is that the specialty portfolio within value-added categories including opportunities within pharmaceuticals and natural ingredients continues to support a positive long-term outlook.
That being said, it's clear that the macro backdrop remains a question mark for Sensient entering 2024. Concerns of a broader global slowdown at a time when interest rates are near a two-decade high haven't inspired much confidence that conditions for sales will significantly improve.
The biggest risk we see when looking at the stock is simply that forward estimates have a further downside. Management just cut the full-year earnings outlook given the softer Q3 and we expect the next few quarters to be more of the same.
According to consensus, the market is forecasting growth to strengthen in 2024 while EPS climbing by 10% towards $3.20 next year. If anything, we can make the case that these estimates are still too optimistic without any evidence that Sensient growth is recovering.
In terms of valuation, we can point to International Flavors & Fragrances Inc. ( IFF ) as the closest comparable to SXT. In this case, both stocks are similarly priced with SXT trading at a small discount on its EV to forward EBITDA multiple but also a premium looking at its 1-year forward P/E at 17x compared to 15x for IFF.
With both companies facing similar macro trends and some current operating weaknesses, we'd say that IFF has the advantage of being significantly larger as representing some competitive moat given ties to key customer relationships. By this measure, we'd expect IFF to command a larger premium with investors also eyeing its more attractive dividend yield at 5% compared to SXT's narrower 3% distribution.
Final Thoughts
We rate SXT as a hold with the implication that its current share price around just under $60.00 or a $2.5 billion market capitalization is near fair value. On the upside, we want to see more over the next few quarters to sustain a stronger rally.
Weaker-than-expected results or more concerning deterioration of the economic outlook opens the door for a deeper selloff in the stock. Monitoring points into 2024 include the adjusted EBITDA margin as well as cash flow trends.
For further details see:
Sensient Technologies: Soft Guidance Paints A Gray Outlook Heading Into 2024