On Wednesday, Deutsche Bank updated its outlook on International Flavors & Fragrances (NYSE:IFF), increasing the stock's price target to $100 from the previous $90, while maintaining a Buy rating. The adjustment follows IFF's recent sale of its Pharma Solutions business, a move that significantly reduced the company's leverage.
According to Deutsche Bank, this reduction is a decisive step in alleviating the leverage concerns that have shadowed IFF's stock since its merger with DuPont (NYSE:DD)'s Nutrition & Biosciences business in February 2021.
The sale of Pharma Solutions has been seen as a pivotal move for IFF, bringing its leverage below the 3x mark. This leverage reduction is believed to be a key factor in addressing the EBITDA valuation discount of 2-3x that IFF has faced when compared to its ingredients peers. The bank's analysis suggests that for every 1x reduction in leverage, there's an $8 increase per share, or a 10% rise in the current share price, signaling a substantial upside potential.
Despite the positive outlook from Deutsche Bank, IFF's shares experienced a slight drop of 0.9% following the sale announcement, in contrast to a 0.6% rise in the S&P 500.
The underperformance of IFF shares post-announcement was attributed to several factors: the sales price of Pharma Solutions met market expectations without exceeding them, the earnout from the sale based on 2024 and 2025 performance was considered modest, and the divestiture multiple was slightly lower than anticipated due to unexpected inclusion of some EBITDA from the Nourish segment.
Looking ahead, Deutsche Bank remains optimistic about IFF's prospects. With a new CEO at the helm prioritizing customer focus, signs of improvement across the company's businesses, and leverage projected to be under 3x by early 2025, the bank sees value in the stock. IFF's valuation stands at 13.4x projected 2025 EBITDA, compared to 16.1x for its industry peers, reinforcing Deutsche Bank's reiteration of a Buy rating.
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