A Rare Wide Moat in the Basic Materials Sector
Undervalued International Flavors & Fragrances' moat is supported by both intangible assets and switching costs.
Andrew Lane: International Flavors & Fragrances is one of the select few wide-moat companies we cover in the basic materials space and, at the time being, it's also trading at an attractive valuation. As its name implies, IFF develops bespoke flavor and fragrance solutions for a wide variety of customers, with its sweet spot being global CPG clients.
The company's wide moat is supported by both intangible assets and switching costs. Intangible assets stem from the R&D spending required for the development of highly engineered, proprietary formulations that can't be precisely replicated by peers. The evidence for switching costs is that, if a customer were to switch suppliers, it would risk losing the highly specific characteristics provided by IFF's products, potentially impairing its own brand equity. Perhaps the best way to think about the company's moat is that IFF's highly valuable intangible assets provide significant pricing power that allows for elevated returns on invested capital while switching costs help ensure the durability of economic profit generation.
Andrew Lane does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.