Sigma-Aldrich formula more than just alchemy

4/7/2008


While jittery stock markets have lost ground in recent months, shares of Sigma-Aldrich ($61; NASDAQ: SIAL) have stubbornly bucked the trend. The chemical manufacturer’s shares jumped 48% over the past year, versus a 4% decline in the S&P 500 Index.

Sigma-Aldrich posted per-share-earnings growth of 14% in 2007 after 9% growth in 2006. Consensus estimates project 11% growth in 2008. Given Sigma’s broad market power and exposure to fast-growing industries in rapidly expanding economies, the company seems well-positioned for continued growth at a rate higher than that of the average chemical maker.

At nearly 24 times 2008 expected earnings, Sigma-Aldrich shares are not cheap. But the stock should provide attractive 24- to 36-month returns from current levels. A pullback near $55 would represent an especially attractive entry point for this Long-Term Buy.

Company chemistry
Sigma-Aldrich sells chemical products to more than 1 million customers in 165 countries, claiming a 20% share of the U.S. market for research chemicals and 10% worldwide. University researchers, medical laboratories, and makers of drugs and chemicals use Sigma’s substances and equipment.

The research essentials division (19% of 2007 sales) supplies laboratories with frequently used chemicals and equipment. The research specialties unit (37% of 2007 sales) provides a range of analytical, chemical, and biochemical substances.

Biotech (15% of 2007 sales) supplies researchers with such life-science products as DNA and gene technology. Sigma’s fastest-growing segment, fine chemicals (29% of 2007 sales), manufactures biochemicals and organic compounds for end uses ranging from pharmaceuticals to semiconductors.

Growth catalysts
Last year, Sigma-Aldrich began a supply-chain initiative meant to expand its profit margins by 150 basis points, or 1.5%. The company estimates that the program should increase per-share profits by $0.05 to $0.08 in 2009 and by $0.19 to $0.24 when the initiative is complete in 2012.

Sigma generates more than 60% of sales outside the U.S. The company has targeted Canada, the Asia-Pacific region, and Latin America as prime markets for expansion. In the December quarter, emerging markets contributed 20% of sales, managing 11% organic sales growth. Sales in China, India, and Brazil grew at least 30%. The construction of a new manufacturing facility in China should support even higher sales in Asia beginning in 2009.

Strong cash flows allow Sigma to augment its organic growth through acquisitions. In February 2007, Sigma bought U.K.-based Epichem for $60 million in cash. In May, the company bought Molecular Medicine BioServices. The acquired companies boosted fine-chemicals revenue 15% in the December quarter.

Sigma has repurchased 84 million of its shares since 1999 and has authorized the repurchase of another 6 million, or roughly 5% of shares outstanding. In February, Sigma raised its quarterly dividend 13% to $0.13 per share. Over the last five years, the dividend has increased at an annualized rate of 18%. An annual report for Sigma-Aldrich Corp. is available at 3050 Spruce St., St. Louis, MO, 63103; (314) 771-5765; www.sigmaaldrich.com.


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