In June 2021 I published my last article on Givaudan (OTCPK:GVDBF) and it was actually one of the few companies that I rated as “Sell” because I considered the stock to be extremely overvalued and not of good value. Since then, the stock has declined by approximately 10% and the sell mark seems to be ok so far. But with business improving and the share price falling, we can take another look at Givaudan and wonder if the stock is reasonably priced right now.

Annual results

As in recent years, Givaudan again recorded solid growth. Sales increased from CHF 6,322 million in fiscal year 2020 to CHF 6,684 million in fiscal year 2021, representing year-over-year growth of 5.7%. Operating profit also increased from CHF 996 million in the prior fiscal year to CHF 1,089 million in fiscal year 2021, resulting in a 9.3% growth of a year to year. And finally, diluted earnings per share increased by 10.5% year-on-year, from CHF 79.96 in fiscal year 2020 to CHF 88.37 in fiscal year 2021.

Free cash flow increased from CHF 811 million in fiscal year 2020 to CHF 843 million in fiscal year 2021, resulting in year-over-year growth of 3.9% other. Margins also increased year over year, with gross profit margin increasing from 42.1% to 42.7% and operating margin increasing to 16.3% from 15.8% last year. This year.

Looking at the two different segments – Taste & Wellness as well as Fragrance & Beauty – we can see that both segments are contributing to the growth and both segments could increase revenue by 5.7% year over year. other. Taste & Wellbeing increased its revenue from CHF 3,398 million to CHF 3,593 million and Fragrance & Beauty revenue increased from CHF 2,924 million to CHF 3,091 million. And while Fragrance & Beauty segment operating profit increased only 2.1% year-on-year from CHF 536 million to CHF 547 million, Taste & Wellness operating profit increased by 17.8% year-on-year, from CHF 460 million to CHF 542 million.

Growth

One of Givaudan’s major issues is the fact that the business needs to grow at an extremely high rate for the stock to be currently properly valued (more on this later). And when you look at growth rates in the past, Givaudan has not been able to perform at such a level. Since 2000, Givaudan could increase its earnings per share with a CAGR of 4.62%.

Only looking at the period between 2007 and 2021 we get a CAGR of 14.91% and looking at the last ten years we get a CAGR of 12.38%. But while it can be tempting to just choose timelines we like, to make our point, that’s not how investing works. Or to put it another way: when we assume that Givaudan will be able to grow earnings per share by around 15% a year just because a particular period supports this thesis, it could spell disaster.

And Givaudan is also not so optimistic about its growth potential in the coming years. Management expects sales growth of between 4% and 5% in the coming years and although improved margins or share buybacks may contribute to EPS growth, we should not be too optimists. It seems unlikely that Givaudan will start buying back shares (nor would it be a wise move given the high share price).

Acquisitions are another means of growth for Givaudan. In December 2021, Givaudan completed the acquisition of DDW The Color House as well as the acquisition of Custom Essence. Of course, acquisitions also lead to higher revenue (and likely higher earnings per share), but DDW The Color House would have contributed around $140 million in sales and Custom Essence would have contributed around $40 million in sales. And that will only add about 3% growth to Givaudan’s business.

Balance sheet

And while Givaudan may continue to make acquisitions in the coming years to continue growing, it should also be borne in mind that the company already has debt on its balance sheet. It’s not like we have to worry about solvency and liquidity, but in my opinion, it wouldn’t make sense for Givaudan to make major acquisitions.

As of December 31, 2021, Givaudan had CHF 428 million of short-term debt and CHF 4,239 million of long-term debt. By comparing the total debt to the total equity of CHF 3,941 million, we obtain a D/E ratio of 1.18, which seems acceptable. But if we compare the total debt to the operating profit that Givaudan can generate annually (1,094 million francs for the 2021 financial year), it would take around 4.25 years to pay off the outstanding debt.

At present, Givaudan has 273 million francs of cash and cash equivalents on its balance sheet, which is enough not to worry about liquidity, but Givaudan could only reimburse a small part of the outstanding debt with this amount.

Dividend

Givaudan also increased the dividend again. Compared to a dividend of CHF 64 in the 2020 financial year, the current dividend of CHF 66 represents an increase of 3.1%. As we can see in the graph below, Givaudan has increased its dividend every year since 2000.

At first glance, one might be a bit shocked by the rather high payout rate. In fiscal 2021, Givaudan will pay out 74% of its earnings as dividends and such a high payout ratio should make us a bit cautious. But if you look at the last 10 years, you can see that Givaudan has always had a high payout ratio and distributed a large part of its profits in the form of dividends to shareholders. In fact, a payout ratio of 74% is the lowest number since 2010, with other years reporting payout ratios as high as 89%.

And although Givaudan pays a large part of its earnings in the form of dividends, the stock still only has a dividend yield of 1.7% and therefore the stock is not really attractive to investors. dividend investors. And especially in recent years, dividend growth has also been poor. Over the past five years, the dividend has been increased with a CAGR of 3.34%, and therefore the stock is also not attractive to dividend growth investors.

And the reason for the rather low and disappointing dividend yield can be found in the extremely high share price, which just doesn’t match the fundamentals in my opinion.

Calculation of intrinsic value

When we look at the price to free cash flow ratio, we see a steady increase in the numbers over time. At the start of 2010, the company was trading at 11 times free cash flow and at the end of 2019 the stock peaked at 47 times free cash flow. Over the past two years, the P/FCF ratio has fluctuated between 31 and 44, and as of this writing, Givaudan is trading at around 35 times free cash flow.

While we can see that Givaudan is now trading for a lower P/FCF ratio, I still wouldn’t call the stock reasonably valued or even cheap. A company and stocks that trade above 30 times free cash flow should be able to grow at a high rate (likely double-digit growth) to be considered fairly valued.

In addition to looking at simple valuation measures, we may also use a discounted cash flow calculation to determine an intrinsic value for Givaudan. As a basis, we can take the free cash flow for the financial year 2021 (CHF 843 million). And let’s be very optimistic about the years ahead and assume 10% growth for the next decade followed by 6% growth to infinity. Using these assumptions (and a 10% discount rate and 9.234 million shares outstanding), we arrive at an intrinsic value of CHF 3,029 for Givaudan.

And although this is a slightly higher intrinsic value than in our last article (CHF 3,000 as intrinsic value for Givaudan) and the stock is trading at a lower price than last time (CHF 3,827 at the time of writing), Givaudan is still trading around 25% above its intrinsic value and Givaudan still has to be called overvalued.

Not only is the stock overvalued according to our discounted cash flow calculation, but the growth assumptions we used are also very optimistic. Honestly, I don’t see how Givaudan will achieve 10% growth in the next ten years. And even if Givaudan could achieve 10% growth, the stock would still be overvalued right now, and the company seems like an extremely risky bet right now.

Conclusion

Givaudan is undoubtedly a large company with a wide economic moat around its business which should ensure the consistency and stability of the business in the years and decades to come, and I am confident that Givaudan will grow at a steady pace. , but I consider the company unlikely to achieve the necessary growth rates (low to mid-teens) to be properly valued. And the goal of investing is not just to find stocks at fair value, but companies and stocks that are trading below their intrinsic value – and Givaudan is not one of them.