August 12, IFF sales declined 4% (down 7% ), reflecting pressure in the fine fragrance and foodservice businesses, which together declined 38% (down 40% as reported). Excluding fine fragrances and foodservice, sales in the company’s remaining portfolio grew 2% on a currency-neutral basis (1% as reported). On a consolidated basis, the 2Q20 adjusted operating margin (excluding amortization) declined 19%. Adjusted 2Q20 EPS excluding amortization fell 15.5% to $1.36, but topped the consensus forecast by $0.05, which accounted for 62% of 2Q sales. The other division, Scent, accounted for 38% of sales, 2Q sales fell $748.3 million. 5%. Currency-neutral revenue was down 4%. The result reflected a 43% decline in fine fragrance sales, partly offset by growth in the consumer fragrance business. Segment profit decreased 25% to $70 million due to lower volume, an unfavorable product mix, and higher raw material costs. The segment profit margin was 15.6%.

 

The company is generating incremental sales from cross-selling Frutarom products. In 2Q20, management said that it was making solid progress toward these goals. The U.S., China, Colombia, Ukraine, and Serbia, though EU approval is not expected until early September. A shareholder vote is set for August 27, 2020.

FINANCIAL STRENGTH & DIVIDEND

Existing debt covenants require a ratio of less than 4-times through March 2021 and 3.5-times after that date. We note that IFF had previously entered into a factoring agreement as part of its deleveraging plan. It also has $1 billion in an untapped revolving credit facility. 

COMPANY DESCRIPTION

International Flavors & Fragrances Inc. has sales, manufacturing, and R&D facilities in 32 countries and distributes its products through its own sales force in North America, Europe, the Asia Pacific, Latin America, and India.

Marriott International Inc

Marriott’s asset-light business model, in which it franchises rather than owns hotels, is a profitable fee-based business, which has enabled raising its dividend and buying back stock. Management has also done a credible job of integrating the Starwood acquisition; however, given the recent slowdown in RevPAR growth and an end to the multiyear upturn in the lodging industry, we think there are higher returns earned elsewhere. For investors interested in the Consumer Discretionary sector, we currently recommend McDonald’s Corp. (MCD) shares. At the same time, our five-year performance to recover in Japan, the Middle East, and North America. The company’s global operating model, in which it can expand room capacity anywhere in the world, is also a strong positive.

 

RECENT DEVELOPMENTS

On August 10, Marriott reported an adjusted 2Q20 .56 per share in 2Q19 and $0.23 below consensus. The wider-than-expected loss reflected weak RevPAR, offset in part by lower total expenses. Revenue fell to approximately $3 billion, driven by the impact of COVID-19 on occupancy and room prices. In the second quarter, adjusted EBITDA fell to $61 million from $952 million in $101 million. Reported revenue decreased 72%, to $1.5 billion, driven by an 87% decrease in base management fees and a 65% drop in franchise fees. International RevPAR fell 87%, despite reopenings in China, Hong Kong, Macau, and Taiwan, where hotels began reopening in May and were fully reopened. The Middle East/Africa segment reported a 78% decrease in RevPAR while the North American RevPAR fell 84%. Worldwide comparable RevPAR fell more than 84%. Nevertheless, reflecting previous repurchases, the share count was down 326 million, to $21.0 billion from $20.8 billion. Adjusted EPS fell to $6.00 from $6.21 but topped management’s guidance of $5.87-$5.90. In 2019, Marriott spent $2.3 billion to repurchase 17.3 million shares.

 

FINANCIAL STRENGTH & DIVIDEND

Standard & Poor’s rates the company taken in account its debt and investment grade, with BBB. To improve liquidity, in April, Marriott issued $1.6 billion in 5.75% senior notes due 2025. The company then raised $920 million through amendments to its cobranded credit cards with JPMorganChase and American Express, helping increase liquidity to $4.4 billion from $2.7 billion. Total debt was $11.8 billion at the end 2Q20, up from $10. The company’s cash position was further improved by the April mentioned above issuance of $1.6 billion in new debt. Marriott’s to 4.2% in 2Q20 from 17.9% in 2Q19. 20.3%, down from a positive 5.9% in 2Q19. In May 2020, Marriott suspended dividend payments.

RISKS

The company is at risk from weak economic conditions, rising operating expenses, and the threat of terrorism, which could hurt both business and leisure travel. Like other lodging companies, it is also facing risks from the coronavirus.

 

COMPANY DESCRIPTION

Marriott International operates and franchises several hotels, resorts, and timeshare facilities in the U.S. and 67 other countries. $43.1 billion, MAR stock is generally classified as large-cap growth.

VALUATION

MAR 31.2-times our revised 2021 estimate, compared to a five-year annual average range of 12-39. Given the company’s weak near-term prospects and the end of the multiyear upturn in the lodging industry, we think there are higher returns to be earned elsewhere.

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