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Author: gebinr Big gold star, 5000 posts Top Recommended Fools Old School Fool Supernova Phoenix 1
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Subject: Report - Sigma-Aldrich (SIAL) Date: 6/1/2003 1:27 AM
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Hi FC,

Here is a research report on one of the chemical supplier companies, Sigma-Aldrich. This company would be familiar to almost anyone who has taken a chemistry lab, since their chemicals can be found in almost every university or high school.

The quick and dirty result? I would pass on this company.

gebin


Introduction
Sigma-Aldrich Corp (SIAL:NASDAQ)
3050 Spruce Street
St. Louis, MO 63103
(314) 771-5765; 800-521-8956 (corporate)
Company website: www.sigma-aldrich.com

Current stock price: $52.31 (5/30/03)
Market Cap: $3.7 B
P/E 19.7

A chemical and biochemical supply company that is one of the biggest players in the field, having been in business for more than 50 years.. They supply over 85,000 biochemicals and organic chemicals to research and industrial laboratories around the world. They have five major brands, Sigma, Aldrich, Fluka, Supelco, and Riedel-deHaen. They supply reagents and supplies to all branches of chemical and life sciences.

To quote from their website (investor relations page), “Sigma-Aldrich is a leading Life Science and High technology company. Our biochemical and organic chemical products and kits are used in scientific and genomic research, biotechnology, pharmaceutical development, the diagnosis of disease and chemical manufacturing. We have customers in life science companies, university and government institutions, hospitals and in industry. Sigma-Aldrich operates in 34 countries and has 6,500 employees.”

Why I am interested
Peter Lynch teaches us to buy what we know, and in one respect, I “know” this company. I earned my undergraduate degree in chemistry and my graduate degree in biochemistry, so I have been familiar with this company's products for many years. You cannot go into a modern chem/biochem lab today without seeing at least one product from them, be it something as simple as sucrose or sodium chloride or something more fancy like 2,6-dichlorophenol indophenol (which I still use today). Their biological compounds are just as good with growth media and supplements (such as amino acids) for E. coli (a bacterium) or S. cerevisiae (a yeast) as just two of hundreds of examples.

In addition, this company showed up in a recent list of A+ companies that have been excellent performers over the past 17 years by Standard & Poor. http://tinyurl.com/6sro

What they sell and to whom they sell it
They sell all kinds of chemicals used in biochemistry and chemistry laboratories of all types. University labs and pharmaceutical companies are typical customers. Biotech companies represent about 40% of their sales volume while universities and government institutions represent another 30%. Their sales are split between the United States (50%), Europe (30%) and the rest of the world. Truly a global company.

Total is more than 85,000 products to over 1,000,000 customers in over 160 countries.

Competition
They have about a 10% market share. Of the list of competitors (Chemical Manufacturers) on Yahoo, I recognized only a few of the names, such as Monsanto and BASF. Another competitor of theirs, Fisher Scientific's division Acros, I did not see.

Quicken, on the other hand, listed several of which I am familiar in the Chemicals – Major Diversified industry. These include Dupont, Dow Chemical, Air Products and Chemicals, and Eastman. SIAL is ranked 8th in market cap out of 10 (way behind Dupont's $49B market cap). According to this website, their revenue growth in the last year, at 4.15%* compared to the industry's 11.22% and the S&P500's –0.95%. However, the 10-year revenue growth rate was 5.22% compared to the industry's 1.06% and the S&P500's 6.61%.

*Note that according to their financial statement, actual revenue increase was only 2.3% between 2001 and 2002. Makes me question some of the other Quicken data presented.

A $10,000 investment 5 years ago would have grown to just over $14,000 (7% CAGR), outperforming its competitors (best at $12,500, worst at $1,600). http://tinyurl.com/d5rz This is a Quicken link. (Note that Standard & Poors says that $10,000 invested in SIAL five years ago would be worth $12,649 at the end of March this year – a 4.8% CAGR.) Not a good return rate for any of them.

Management
Chairman, president, and CEO are all in one person, David Harvey. He has held these positions for several years (chairman since Jan 1, 2001, president since March 1995, and CEO since November, 1999). He has been a director since 1981, was the Executive Vice President for more than five years before being chosen as president, and was COO for five years before being chosen as CEO.. A nice long term with the company, but having all three top positions in one person is worrisome.

Discounting revenue growth due to currency conversion (year-over-year), first quarter's overall revenue growth was 2.5% (compared to 11% including currency). Harvey said the following in the press release that contained the first quarter numbers.
Given the current economy and conditions in our markets, I am pleased with our sales growth, our ability to maintain profit margins, and our significant growth in earnings per share. While currency has given us a nice lift, we'll continue to run our business on what we can control. I am encouraged by our level of activity in launching new sales and marketing initiatives as well as by our ability to build on process improvement accomplishments as we seek to achieve our targeted growth in sales, earnings and return on equity. We have shared our new initiatives with all 6,000 of our employees worldwide. They are actively involved to boost sales growth and maintain profit margins in 2003. With our new management assignments and initiatives and an increased level of energy throughout the Company, we fully expect to improve on first quarter sales growth in the remaining quarters of 2003. from http://biz.yahoo.com/bw/030422/225928_1.html

This does not fill me with confidence. Currency did not just give them “a nice lift”, it drove the majority of their reported revenue growth. I am not sure what sharing “our new initiatives with all 6,000 of our employees worldwide” means beyond sending out a memo.

Risks
When budgets at research labs cut back, as is currently happening (the National Institutes of Health is only getting a 2% raise this year, instead of its more usual 4%), this will certainly have an impact upon future sales growth. In fact, it has already had an impact, as quoted here: “Currency adjusted sales gains in the first quarter benefited from price increases of 4.1%. Lower unit volume in the U.S., due to reduced demand from pharmaceutical companies as well as the impact of spending controls and funding delays in non-profit accounts, partially offset the price gain.” from http://biz.yahoo.com/bw/030422/225928_1.html

Slower growth in sales than their industry peers in the last year could indicate several things. One mentioned that I saw was increased prices for their products. This might explain the decrease in year-over-year sales in the Fine Chemicals products in the most recent quarter.

Their stock price has moved up over 25% in the last two-and-a-half months from a low of 41.56. (This outpaces the S&P500's growth of 20% in the same time frame.) They released their first quarter numbers in mid-April and reported an 11% increase in sales. However, 8.5 points of that came from currency exchange improvements (due to the weakened dollar). So real sales growth year over year for the first quarter was only 2.5%.
The only news I can find for them that might indicate why their stock price has jumped so much recently is that they recently signed an agreement to distribute some chemicals manufactured by GlaxoSmithKline. The rest of the news items are primarily about their end of year and first quarter reports and results. The run-up might just be overall market reflection.

Selected financial numbers:
All $ in millions, except per share data. All data for fiscal years (ends at end of December). “%G” is % growth, year-over-year. CAGR is compounded annualized growth rate. n/c is not calculated

Revenue:
  FY    2002    2001    2000    1999    1998
Rev 1207 1179 1096 1038 1194
%G 2.4 7.6 5.6 -13.0 n/c
CAGR-4 yr = 0.27%
Net income:
  FY       2002    2001    2000    1999    1998
Net Inc 131 141 320* 172 166
%G -7.1 -55.9 86.0 3.6 n/c
CAGR-4 yr = -5.7%
*reflects a one-time gain of $171 M from sale of a subsidiary.
Free cash flow (operating cash flow – capex):
  FY    2002    2001    2000    1999    1998
FCF 295 51 47 150 34
%G 480 9.0 -68.9 340 n/c
CAGR-4 yr = 71%
Return on Assets (net income / total assets):
  FY    2002    2001    2000    1999    1998
ROA% 13.4 9.8 10.3 10.4 11.6
%G 37.5 -5.3 -0.6 -10.6 n/c
Return on Equity (net income / shareholder equity):
  FY    2002    2001    2000    1999    1998
ROE% 21.2 17.4 16.2 11.8 13.7
%G 21.8 7.4 37.1 -13.7 n/c
LT debt / total assets:
  FY    2002    2001    2000    1999     1998
0.13 0.12 0.07 0.0001 0.0002
%G 3.1 64.9 53000+ -51.2 n/c
Current ratio (current assets / current liabilities):
  FY    2002    2001    2000    1999    1998
2.6 1.8 2.1 7.3 5.4
%G 43.0 -14.0 -71.0 35.1 n/c
Valuation:
Using StockWorth's 3-stage growth valuation based on earnings and lowest of Zack's analyst 5-yr growth predictions, here is an estimate of current value (using a 12% discount rate). X / Y / Z are annual growth rates for 0-5 yr / 5-10 yr / 10+ yr. I used ttm earnings of $192.99 M (taking into account “extras and discontinued operations”).
  10 / 8 / 3 . . . $47 . . . 20% safety margin = $37.60
Current price: $52.31

Conclusions
I started off being somewhat excited about this company since it was one I was personally familiar with (at least their products), but lost my hopes fairly early. The recent ultra-bland statement by the CEO (quoted above) didn't really tell me anything, neither did management's comments in the 10-K reports I went through.

While they make good products, they tend to be on the pricey side and if I were a lab-manager, I would probably be looking elsewhere for any chemicals I needed to purchase. Their revenue growth was relatively flat for the last quarter and for 2002.

They are currently over-valued. In March, they were probably close to fairly valued, or bit undervalued. Buying at the low would have given a 25% return, but there are plenty of other companies out there and the S&P500 alone is up 20% from the same time, so I do not think SIAL is a great “miss”. The market tends to give them a P/E premium and their current level is right around that average. Again, not a recommendation for buying at this time.

All in all, I would pass on this company.
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