The next time you buy an energy drink from Monster (Nasdaq:MNST), shampoo from Procter & Gamble (NYSE:PG) or almost anything involving color, flavor or fragrance, Milwaukee's Sensient Technologies (NYSE:SXT) might have had something to do with the product's development. Starting out in 1882 as the Meadow Springs Distilling Company, it moved from the food business into the specialty chemical business in 2000, changing its name from Universal Foods to Sensient Technologies to reflect its new focus. Business has been good since the transformation. If you're looking for a small-cap stock to own, this is one to consider. Here's why.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

First Quarter Results

As far as its historical record goes, its first quarter numbers are better than they've ever been. Revenues grew 4.6% to $365.7 million while operating income grew 6.6% to $46.5 million, and earnings per share increased 9.4% to 58 cents. It was the 10th consecutive quarter meeting or exceeding analyst expectations. Sensient is on a roll. Things are so optimistic CEO Ken Manning raised its 2012 earnings per share guidance to between $2.50 and $2.59 per share, a two cents increase at the bottom end of the range.

Its business is divided into two segments: Flavors and Fragrances and Color. The color segment had the better results in the quarter with revenues up 4.5% to nearly $131.3 million, operating income increasing 14.2% to about $25.5 million and operating margins improving by 160 basis points to 19.4%. The color group continues to focus on digital links, pharmaceutical coatings and several other growth opportunities. More importantly, it expects to maintain the segment's operating margins throughout the year. If you look at operating margins for the entire company since 2002, you'll see that its best year came in 2002 at 15.6%. In the first quarter that year, the color segment achieved an operating margin of 23.5%, 410 basis points higher than in 2012. The operating margin for flavors and fragrances in the first quarter of 2002 was 14.1%, 50 basis points higher than today. While delivering record numbers on an absolute basis, it needs to keep nudging profitability upward. It's not an easy task, but I don't see why it can't be done over the next couple of years.

SEE: A Look At Corporate Profit Margins

Stable Shares

In the past decade, its shares have achieved an annualized total return of 5.87%, 184 basis points higher than the S&P 500. More importantly, in 2008, when the index lost 37% of its value, Sensient was off just 12.94%. Only once in the past decade has it lost more than 20% in a given year, and even then it was only down by 22.9%. It's a very stable stock with a dividend yield over the past decade that has averaged around 2.87%, meaning the capital appreciation accounted for a little more than 50% of its total returns. Its business model of providing the building blocks for some of the great consumer brands in America and elsewhere enables it to provide consistent, albeit boring returns. If you are an income investor you should be interested in this stock.

Balance Sheet

Its biggest direct competitor is New York-based International Flavors & Fragrances (NYSE:IFF), with revenues that are approximately double that of Sensient's with operating margins of 300 basis points higher. So why should you buy the smaller company? For starters, its enterprise value as a multiple of EBITDA is lower. Secondly, and more vital, is the fact its net debt to capital ratio is 24.2% compared to 39.9% for International Flavors & Fragrances. However, there's a caveat. IFF has done a lot of share repurchasing over the years, which has dramatically reduced its book value. If you add back treasury stock to both companies, the net debt to capital ratios is both around 24%. However, the $1.4 billion spent over the years buying back its stock should have gone to eliminating its debt. For this reason, I prefer Sensient's balance sheet.

SEE: A Breakdown Of Stock Buybacks

The Bottom Line

Both of these companies help make brands successful and they both generate consistent returns. For me, the decision comes down to allocation of capital. In my experience, share repurchases almost never achieve satisfactory results making Sensient the more sensible investment.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!