In this article, let's take a look at Sigma-Aldrich Corp (SIAL, Financial), a $16.07 billion market cap company, which is a life science and high-tech company that develops, manufactures, purchases, and distributes various chemicals, biochemicals, and equipment worldwide.
Large Portfolio
The company is now an extremely important provider of life science and technology consumables, reagents, and raw materials around the world.
It has a large portfolio when compared to its peers and it reaches several markets, such as diagnostics, electronics, industrials, pharmaceuticals, and academic research.
We believe in certain key drivers that should help boost revenues in the future. Those are: the position in all markets that it operates; the relative predictability of its cash flows stream and the expansion in emerging markets.
Announcement
Merck KGaA (MRK, Financial) announced a few days ago that it agreed to buy Sigma for nearly $17 billion in cash, according to Bloomberg news. The deal will benefit the company for the expansion in chemicals (primarily used in research labs and pharmaceutical manufacturing) and reduce its dependence on drug development. “With this acquisition we have the opportunity to turn one of our most reliable businesses into a core earnings contributor," said Merck's CFO Marcus Kuhnert. The company saw its shares rise more than 33% on that day.
Management
Principally, the products are consumables, which mean they are less vulnerable to economic downturns. This added to the fact that strategic decisions were made by management. As a result, these generated good results. Efforts made in pricing policy, operating leverage, and efficiency measures, made improvements in the bottom line.
Revenues, Margins and Profitability
Looking at profitability, revenues decreased by 2.93% but earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.11 vs $0.98). During the past fiscal year, the company increased its bottom line. It earned $4.05 versus $3.78 in the prior year. This year, Wall Street expects an improvement in earnings ($4.36 versus $4.05).
The gross profit margin is considered high at 55.78%, and the net profit margin of 18.97% is above the industry average.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| SIAL | Sigma-Aldrich | 17.76 |
| CE | Celanese Corp | 51.10 |
| ASH | Ashland Inc | 12.71 |
| IFF | International Flavors & Fragrances | 25.55 |
| GRA | W R Grace & Co | 54.65 |
| Â | Industry Median | 7.01 |
The company has a current ROE of 17.76% which is higher than the industry median. Also, it is higher than the one exhibit by Ashland (ASH, Financial).
In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, for investors looking at those levels, Celanese (CE, Financial), International Flavors & Fragrances (IFF, Financial) and W R Grace (GRA, Financial) could be the options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 32.1x, trading at a premium compared to an average of 24.40x for the industry. To use another metric, its price-to-book ratio of 5.20x indicates a premium versus the industry average of 1.79x while the price-to-sales ratio of 5.9x is above the industry average of 1.05x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final Comment
We believe the company has a good portfolio with global distribution, and is well positioned in all markets. All these should allow Sigma to sustain its high returns.
Further, the PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like Tom Gayner (Trades, Portfolio), Jim Simons (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Donald Yacktman (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Manning & Napier Advisors, Inc.
Disclosure: Omar Venerio holds no position in any stocks mentioned
