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Author: Solidago One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 46841  
Subject: Sigma-Aldrich (SIAL) Date: 1/25/2004 10:49 AM
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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
Dec-02 15.5% 9.2% 11.6%
Dec-01 16.9% 10.1% 12.7%
Dec-00 30.2% 23.0% 27.0%
Dec-99 13.9% 12.0% 13.6%


2 Has the company avoided excess debt?
Yes

			
Period LT Debt/Equity
9/1/03 0.18 Q
Dec-02 0.20
Dec-01 0.22
Dec-00 0.12
Dec-99 0.00
Dec-98 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
Dec-02 10.8%
Dec-01 11.9%
Dec-00 29.2%
Dec-99 16.6%
Dec-98 13.9%

4 Are managers handling shareholders' money rationally?
Yes
Managers are agressively buying back shares and increasing dividends!
				
Period Shares Dividends Yield
Dec-02 71.3 $0.34 0.64%
Dec-01 73.0 $0.33 0.54%
Dec-00 76.2 $0.31 0.73%
Dec-99 98.3 $0.29 0.65%
Dec-98 100.7 $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
Dec-02 $12 "$3,795" -$57.56
Dec-01 -$82 "$4,491" -$15.26
Dec-00 -$612 "$3,242" $1.87
Dec-99 $35 "$4,387" $1.72
Dec-98 $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
Dec-02 268.8
Dec-01 42.4
Dec-00 669.4
Dec-99 129.1
Dec-98 -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 long-term 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

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27966 of 46841
Subject: Re: Sigma-Aldrich (SIAL) Date: 1/25/2004 11:40 AM
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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 in-depth research (just looked at some stuff on Yahoo). But it looks like SIAL's revenues grew about 7% over the last nine months (Y-O-Y). Just doing a quick calculation on it, I think I would expect maybe 7-7.5% 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





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Author: gebinr Big gold star, 5000 posts Top Recommended Fools Old School Fool Supernova Phoenix 1
Mission Team Member CAPS All Star SC1 Red Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27967 of 46841
Subject: Re: Sigma-Aldrich (SIAL) Date: 1/25/2004 11:45 AM
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Hi Solidago,

Nice review on Sigma-Aldrich.

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 mini-Merck 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 10-Qs and/or 10-Ks.

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


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Author: Solidago One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28016 of 46841
Subject: Re: Sigma-Aldrich (SIAL) Date: 1/26/2004 10:00 AM
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Hi gebin,

I have a question about your valuation of the company. I came up with a lot higher of a number for Sigma-Aldrich'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


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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28026 of 46841
Subject: Re: Sigma-Aldrich (SIAL) Date: 1/26/2004 1:31 PM
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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

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Author: gebinr Big gold star, 5000 posts Top Recommended Fools Old School Fool Supernova Phoenix 1
Mission Team Member CAPS All Star SC1 Red Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28280 of 46841
Subject: Re: Sigma-Aldrich (SIAL) Date: 2/1/2004 4:09 PM
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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 had
Years 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% year-to-year. Rather, they differ by almost exactly $50.14.

I'm sorry, but I just didn't follow your math. Please explain.

gebin


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Author: Solidago One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28452 of 46841
Subject: Re: Sigma-Aldrich (SIAL) Date: 2/5/2004 9:26 PM
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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% year-to-year. 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

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