Value Line assigns Financial Strength ratings across a spectrum from A++ (Highest) to C (Lowest). Generally speaking, the largest companies with the strongest balance sheets get the highest scores. Factors considered in making a rating determination include balance sheet strength, corporate performance, market capitalization, stability of returns, and business outlook, among others.
The Financial Strength rating and a stock’s Price Stability rank are the two main components used to determine Value Line’s proprietary Safety Rank, which measures the total risk of a stock relative to the approximately 1,700 other stocks under Value Line review.
Although a company’s Financial Strength rating is just one factor among many that investors should consider, it is an important one. Moreover, shareholders should take particular note of changes in this rating—both up and down. Value Line subscribers have access to our complete list of Financial Strength upgrades and downgrades each week in the Selection & Opinion section of the product. Noted here, however, are Aeropostale, Inc. (ARO) which was recently given a downgrade, and International Flavors and Fragrances, Inc. (IFF), which was awarded an upgrade.
Aeropostale is a mall-based specialty retailer that targets young women and men in the 14- to 17-year age range. The company's objective is to provide high-quality, active-oriented casual apparel and accessories at value prices. Its merchandise can only be purchased at company stores or organized sales events at college campuses. In 2013, Aeropostale operated 871 stores in 50 states and Canada.
Value Line recently lowered Aeropostale’s Financial Strength Rating two notches from a B to a C+. The company recently released fiscal first-quarter (ended May 3rd) results, and Wall Street was far from impressed. Although the loss per share of $0.52 was better than our estimate of $0.70, revenues fell 12%. Same store sales came in at a dreadful -13%, owing to weak mall traffic from harsh winter weather conditions, as well as aggressive price competition. Surprisingly, e-commerce sales dropped 18%, a stark contrast to the rapid growth experienced by Aero’s peer group.
In addition to the troubling sales trends, management’s guidance left much to be desired. The loss per share for the July interim is expected to be $0.55 to $0.61. The company is working to cut costs, close underperforming stores, update the product mix, while creating more engaging marketing campaigns. Nonetheless, given the retailer's deteriorating brand and stiff competition, a turnaround is apt to be long and uneven, with no guarantees. We suggest investors hold off on these shares until a clear sign of a rebound materializes.
International Flavors & Fragrances, Inc.
International Flavors and Fragrances is a leading manufacturer of flavor and fragrance chemicals sold to consumer products manufacturers worldwide. Particularly, these products are used in such items as perfumes, prepared foods, pharmaceuticals, beverages, and detergents. The Fragrances division accounted for about 52% of the company’s total sales in 2013, and the Flavors unit was 48%. Overseas businesses generated some 77% of sales.
These shares were recently upgraded to an A+ Financial Strength rating from their previous score of A. The company is coming off a strong top-line advance of 7% year over year in the first quarter, with strength coming from both developed and emerging markets.
On a segment basis, the Fragrances division led the way, with a robust 8% revenue increase over the prior year’s mark. Interest in the company’s encapsulation technology boosted demand for its hair care and fabric care offerings. Meanwhile, the Flavors segment recorded more-moderate results. Sales for that unit improved 3%, reflecting good contributions from international operations and a 4% revenue decline in North America.
Management expects revenues to increase at a slightly slower rate in the June quarter. We think the top-line will advance 5% in the period, bolstered by untapped opportunities in emerging markets and a more stabilized economic environment in Europe.
Because IFF’s chemicals are found in so many different consumer products that are used on a daily basis, it is largely insulated from fluctuations in economic output. The shares also possess solid fundamentals and a reasonably leveraged balance sheet. Although the dividend is only average, we think conservative investors may be interested in the shares.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.