Tuesday, February 8, 2011

Givaudan Warns of Rising Raw Material Costs



Rising raw material costs are threatening to trim margins at flavours and fragrances companies.Industry leader Givaudan gave results to day and they confirmed the strong performance of this industry.

The stocks and sector are attractive to buy because they offer a combination of good cyclical growth (perfumes and other discretionary spending products) and secular growth trends. The latter being  exposure to emerging market growth and trends in personal healthcare (scents in creams etc) products. Moreover, the downside is limited by the secular trends within the food sector, which is relatively recession resistant.

The leading global players in this industry are Givaudan, Firmenich, International Flavors & Fragrances and Symrise.  My preferred play in the sector would by Symrise of Germany, which has relatively high exposure to emerging markets and is strongly positioned in the consumer health care market. However, I think today's statement by Givaudan is sufficient reason to hold off buying the stocks just yet.

In a post results interview Givaudan CEO Gilles Andrier talked of very high levels of raw material prices in the last few months. He also discussed high single digit to low double digit growth in raw material costs. All of which is hardly surprising, nor is it unexpected that Givaudan will seek to pass on these price increases. The CEO talked of conditions being similar to 2008 but, in reality, they are not.

Raw materials price rises may well be rising again, but this time around there isn't a major recession coming in terms of end demand. In other words, the flavours and fragrances companies should be able to pass on the rising input costs.

However, the price action today doesn't lie. It will take a while for the price increases to take effect and I think these companies will come under sporadic pressure as they all will all need to inform the market of the short term margin pressures. There will be a time to buy them, but it isn't just yet.