Recommendations: 8
Looks like the Foolish Collective took a look at Sigma Aldrich Corp. last year, http://boards.fool.com/Message.asp?mid=19124646. I recently found this company on one of my screens and I decided to take a bit closer look. I like what I saw. Nice growth, good price and very shareholder friendly finances.
Here is my analysis:
SIGMA ALDRICH CORP (SIAL ) [Data from MSN]
1 Has the company performed well consistently? Yes ROE is increasing
Period ROE ROA ROIC 9/1/03 21.4% TTM Dec02 15.5% 9.2% 11.6% Dec01 16.9% 10.1% 12.7% Dec00 30.2% 23.0% 27.0% Dec99 13.9% 12.0% 13.6%
2 Has the company avoided excess debt? Yes
Period LT Debt/Equity 9/1/03 0.18 Q Dec02 0.20 Dec01 0.22 Dec00 0.12 Dec99 0.00 Dec98 0.00
3 Can managers convert sales to profits? Yes Net profit remains about 10%.
Period Net Profit Margin 9/1/03 14.9% Q Dec02 10.8% Dec01 11.9% Dec00 29.2% Dec99 16.6% Dec98 13.9%
4 Are managers handling shareholders' money rationally? Yes Managers are agressively buying back shares and increasing dividends!
Period Shares Dividends Yield Dec02 71.3 $0.34 0.64% Dec01 73.0 $0.33 0.54% Dec00 76.2 $0.31 0.73% Dec99 98.3 $0.29 0.65% Dec98 100.7 $0.28 0.65% Rate 6.67% 3.96% 0.40%
5 Has management actually increased shareholder value? Not obviously.
Period Retained Earn. Market Cap Ratio Dec02 $12 "$3,795" $57.56 Dec01 $82 "$4,491" $15.26 Dec00 $612 "$3,242" $1.87 Dec99 $35 "$4,387" $1.72 Dec98 $134 "$4,327" Total $512 $532 $1.04
6 Has the company consistently increased owner earnings? Yes
Period Owner Earnings 9/1/03 329.1 TTM Dec02 268.8 Dec01 42.4 Dec00 669.4 Dec99 129.1 Dec98 17.2 Rate 11.7%
7 Is the stock currently selling at a 25% discount to intrinsic value? No
Current Price $56.99 Discount Graham's Formula $66.44 14% Dam IV $36.76 55% OE IV (5 yr. reg.) $100.17 43% OE IV (5 yr. current) $109.37 48%
PosFCF PosFCF/sh PosFCF yield PosFCF Screen $253.30 $3.55 6.2% $236.00 $3.36 5.9% TTM
Assumptions 10.8% G rate for Graham's 5 Length of high growth period 4.0% Stable growth rate 10% Discount rate
8 Is the business easy to understand? This is not the easiest business to understand. Knowledge of chemistry is important to understanding the business.
9 Does the business have favorable longterm prospects? This business is a Weak Franchise/Strong Commodity Business. Their specialty in chemicals for biotechnology/genetics is a growth industry that is likely to keep growing for a while.
10 Is management rational? There is no current indication that management is not rational. However, I would like Mr. Harvey to foster some leadership development in his company buy promoting someone into either the Chairman or CEO position.
11 Is management candid with its shareholders? I'm not sure yet on this one. While there isn't a lot put out for shareholders,
I'm not sure whether or not they are being candid with their shareholders. I haven't read any material yet by the company that discusses negative developments. Anyone here have an
opinion on this?
12 Does management resist the institutional imperative? Not sure. They seem to have their own direction under David Harvey.
Let me know if you have any questions regarding my analysis. I'm hoping to make a purchase decision soon on this company and would love to hear your thoughts on it.
Solidago

Recommendations: 3
Solidago
Nice analysis!
Good to see you back!
I'm hoping to make a purchase decision soon on this company and would love to hear your thoughts on it.
If you bought this company, what would your expectations be for the investment?
Do you have, say, a minimum and maximum expectation of return on investment? Does the current price offer you what you would consider a margin of safety?
I haven't done any indepth research (just looked at some stuff on Yahoo). But it looks like SIAL's revenues grew about 7% over the last nine months (YOY). Just doing a quick calculation on it, I think I would expect maybe 77.5% return over the next year. (Roughly 6%+ increase in the value of the investment from cash flowing to the bottom line plus 1%+ dividend). But then, if this industry is somewhat cyclical and is about to come into its good time of the cycle, or if it is the kind of industry that will benefit from higher commodity prices and demand, the price performance could really exceed those expectations. Conversely, if it is entering the down phase of a cycle.....
At 14 times Book Value though, it is certainly not cheap. I think I would want to be convinced in the longevity of the demand for their goods and services before committing.
So, to sum it up:
Nice analysis! Determine investment objectives and range of anticipated likely outcomes (best case, worst case). Try to determine sustainability of demand for goods and services for the period you're likely to own it.
PosFCF

Recommendations: 2
Hi Solidago,
Nice review on SigmaAldrich.
I would still pass on this one. Updating my discounted earnings calculation for the most recent data, (assuming 10% growth for 5 years, 8% for next five years, 3% after that, 12% discount) gives an IV of $54, slightly below Friday's close of $56.99. A 25% discount brings it down to $40.50 as a purchase price.
They have a commodity business. Both Fisher and VWR Scientific come to mind as suppliers of research chemicals and that's without even thinking. I have found Fisher's prices to be less than Sigma's, at least for the stuff I need to buy. For some of their specialty products, there are other (maybe smaller) vendors, also. I like SIAL's catalog of chemicals because they provide a fair amount of information about the various chemicals (melting point, boiling point, solubility, toxicity, etc.), sort of like a miniMerck index. But's that about all I ever do with it. :P
If you're concerned about a lack of discussion of negative developments, see if that is normal or not by reading management's discussion in the last several 10Qs and/or 10Ks.
When I reviewed it back then, I also got a neutral feeling about management, so you are not alone there. Admittedly I haven't read their most recent financial statements, but until their price drops lower, I don't feel a need to do so.
gebin

Recommendations: 1
Hi gebin,
I have a question about your valuation of the company. I came up with a lot higher of a number for SigmaAldrich's value using FCF. Let me show you my work.
Free Cash Flow TTM Years from present 0.75 0 1 2 3 4 a) Cash from Operations 320.9 351.2 159.1 115 230.9 162.1 b) Cap Ex 17 24 145.5 320.8 90.8 167.5 = FCF 303.9 327.2 13.6 435.8 140.1 5.4
Doing a regression analysis I get the following equation: y = 45.317*YEAR + 306.8 This gives me approximately a FCF growth rate of 13.6%. My FCF forecast is then:
Years into future 1 2 3 4 5 Regression forecast $329.98 $380.13 $430.27 $480.42 $530.56 Present Value $299.99 $314.16 $323.27 $328.13 $329.44
I assume a 10% discount rate to get the present value. I add up the 5 years of present value and add on a terminal value based on year six ($327.79 present value) and a 4% growth rate.
I then calculate the following:
5 years of growth Enterprise Value Cash Debt Total Equity Per share value Regression forecast $7,058.20 $118.60 $176.40 $7,000.40 $99.72
My calculations give me a valuation of $99.72 per share. Maybe I'm doing something wrong here. Any thoughts? I would love to see someone else's valuation of this company so I can see if my own work is valid.
By the way, using Graham's formula I get a value of $66.44 per share.
Solidago

Recommendations: 1
Great Analysis 
I would like to make a couple of points  In #8 you say, This is not the easiest business to understand. Knowledge of chemistry is important to understanding the business. Well yes, very few people will understand all the chemistry experiments or tests. And very few of us understand how the Windows Operating System works either!!
But we can understand SIAL sells chemicals used by research people  probably the chemical are a minor expense. Purity of the chemical is critical  hmmmm maybe they would replace a partially used bottle???
Additionally they sell more different products then Home Depot and Lowes combined! That is not without it good (barriers to entry) and bad (lots of SKUs) sides.
I have not looked in recent years, but I have always felt this was a good steady performing company  the kind I would like in retirement as opposed to growth before retirement.
Gordon Atlanta

Recommendations: 1
Hi Solidago,
Sorry to take so long to address your question to me.
I'm not quite sure I follow what you are doing.
Years from present 0.75 0 1 2 3 4 a) Cash from Operations 320.9 351.2 159.1 115 230.9 162.1 b) Cap Ex 17 24 145.5 320.8 90.8 167.5 = FCF 303.9 327.2 13.6 435.8 140.1 5.4 Where did you get the CapEx number? I get the following from their annual Cash Flow statements and with CapEx being Plants, Property & Equipment expenditure:Years from present 2002 (0) 2001 (1) 2000 (2) 1999 (3) a) Cash from Operations 351.2 159.1 115.0 230.9 b) Cap Ex (PP&E) 56.6 106.7 68.3 90.8 = FCF 294.6 52.4 46.7 140.1 Then you wrote Doing a regression analysis I get the following equation: y = 45.317*YEAR + 306.8 This gives me approximately a FCF growth rate of 13.6%.
Did you plot FCF versus time and fit a linear equation to it to get that equation? If so, where did the 13.6% growth rate come from?
Then you hadYears into future 1 2 3 4 5 Regression forecast $329.98 $380.13 $430.27 $480.42 $530.56 How did you get these numbers? They don't seem to grow by 13.6% yeartoyear. Rather, they differ by almost exactly $50.14.
I'm sorry, but I just didn't follow your math. Please explain.
gebin

Recommendations: 0
gebinr wrote: I'm not quite sure I follow what you are doing.
Years from present 0.75 0 1 2 3 4a) Cash from Operations 320.9 351.2 159.1 115 230.9 162.1b) Cap Ex 17 24 145.5 320.8 90.8 167.5= FCF 303.9 327.2 13.6 435.8 140.1 5.4
Where did you get the CapEx number? I get the following from their annual Cash Flow statements and with CapEx being Plants, Property & Equipment expenditure:
Years from present 2002 (0) 2001 (1) 2000 (2) 1999 (3)a) Cash from Operations 351.2 159.1 115.0 230.9b) Cap Ex (PP&E) 56.6 106.7 68.3 90.8= FCF 294.6 52.4 46.7 140.1
I got my figures from MSN, since this is only a preliminary review of the stock. I'm actually using NET capital expenditures (CapEx PPE  Sale of CapEx). This also includes sales of facilities and business units and acquisitions of businesses. See http://www.sec.gov/Archives/edgar/data/90185/000095013103001664/dex13.txt I believe that is appropriate to use net CapEx versus straight CapEx, at least according to DAM. Is this correct?
Then you had
Years into future 1 2 3 4 5Regression forecast $329.98 $380.13 $430.27 $480.42 $530.56
How did you get these numbers? They don't seem to grow by 13.6% yeartoyear. Rather, they differ by almost exactly $50.14.
To get the growth rate, which I don't really use for the valuation, I use the geometric mean. The geometric mean = (FCFyr5/FCFyr0)^(1/5)1 or (530.56/279.83)^(1/5)1. The difference each year is exactly $50.14, since I used a straight line regression of the past 5 years FCF.
Hope that clears it up.
Solidago


