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Sigma-Aldrich's New Tech Proves Recession-Proof
Despite Mr. Market's fearful state and beastly ravaging of share prices of firms in various industries, many operators in the healthcare sector are seeing business fundamentals hold up quite well. Topping the list is Sigma-Aldrich (Nasdaq:SIAL), which reported steady third quarter results on Tuesday, October 21. The company possesses a number of appealing qualities that should help it withstand even the most dour global economic conditions.
Conference Call
During the earnings conference call, Chief Financial Officer Mike Hogan was quick to point out that although Sigma-Aldrich's business model is recession-resistant, it is not necessarily immune to downturns. Hogan mentioned that there was no indication that expectations would not be met for the fourth quarter. The third quarter diluted earnings per share of 64 cents came in two cents below the 66 cents per share that analysts were projecting. Still, 64 cents per share represents a 19% year-over-year increase, even though top-line trends appear to be moderating, as third quarter sales increased only 7%. (Read more on forward-looking comments and predictions in Can Earnings Guidance Accurately Predict the Future?.)
A strengthening U.S. dollar is making sales growth more of an uphill battle. 60% of Sigma-Aldrich's sales stem from overseas markets. While management expects currency benefits to boost overall sales 3% to 4% for the full year, the rapid dollar rise is projected to dent fourth quarter sales by 3%. Thus, Sigma-Aldrich is still calling for 7% organic growth for 2008, which is in line with stated long-term goals. In addition, the company confirmed its earnings guidance range of $2.62 to $2.72.
International Sales and New Products
For those not familiar with the firm, Sigma-Aldrich technically is a chemicals company. However, it serves life science companies, universities, hospitals and others in the healthcare industry by providing chemical products and kits that are used in scientific, genomic, pharmaceutical and biotech research. In other words, it provides tools and consumable raw materials to scientists working at Merck (NYSE:MRK), Abbott Labs (NYSE:ABT), Lifepoint Hospitals (Nasdaq:LPNT) or Biogen Idec (Nasdaq:BIIB). On October 28, Sigma-Aldrich announced the launch of its TransPlex Whole Transcriptome Amplification (WTA2) technology. According to the company, WTA2 is a sensitive, fast and robust method of amplifying total RNA from various tissue sources. This method will help genomics researchers who work with samples of limited quantity and quality. (To evaluate what this means for investors, read A Checklist for Successful Medical Technology Investment.)
A well-renowned potential client list is just the tip of the iceberg as Sigma-Aldrich, which boasts 80,000 customer accounts in 36 countries. It also sells an astounding 130,000 products comprised of 400,000 stock-keeping units (SKU) and demonstrates impressive geographic, customer and supplier diversity that keeps one region or party from imposing too much control over its operations. As Mike Hogan alluded, these are the key ingredients that make Sigma-Aldrich relatively resistant to recession.
Cash Flow
In addition to the stable business model, Sigma-Aldrich is quite profitable. Third quarter net margins came in at 15% and should only increase as management has plans to boost margins by 150 basis points by 2010. It is, however, keeping the specific details of how it intends to do this tightly under wraps, although the company has stated intentions to "accelerate, elevate and innovate" its business and, in the process, boost cash flow production. Sigma-Aldrich has used its profits to reinvest into the business, repurchase $291 million in stock and pay a 13% higher quarterly dividend.
The Bottom Line
I have kept an eye on Sigma-Aldrich's stock as a potential investment for some time. Its valuation typically has been too rich for my blood, but overall market malaise has pushed the current P/E ratio to a very reasonable 14 times 2008 full-year projections. The P/E numbers represent a five-year low and I would jump at the opportunity if it weren't for the presence of even better deals in the market right now. Big pharma comes to mind, with industry giants such as GlaxoSmithKline (NYSE:GSK) at 10 times earnings and medical device titan Medtronic (NYSE:MDT) with a forward P/E of under 12. Yet, with downside protection a major theme in the markets these days, it's hard to think of a safer play than Sigma-Aldrich.
Conference Call
During the earnings conference call, Chief Financial Officer Mike Hogan was quick to point out that although Sigma-Aldrich's business model is recession-resistant, it is not necessarily immune to downturns. Hogan mentioned that there was no indication that expectations would not be met for the fourth quarter. The third quarter diluted earnings per share of 64 cents came in two cents below the 66 cents per share that analysts were projecting. Still, 64 cents per share represents a 19% year-over-year increase, even though top-line trends appear to be moderating, as third quarter sales increased only 7%. (Read more on forward-looking comments and predictions in Can Earnings Guidance Accurately Predict the Future?.)
A strengthening U.S. dollar is making sales growth more of an uphill battle. 60% of Sigma-Aldrich's sales stem from overseas markets. While management expects currency benefits to boost overall sales 3% to 4% for the full year, the rapid dollar rise is projected to dent fourth quarter sales by 3%. Thus, Sigma-Aldrich is still calling for 7% organic growth for 2008, which is in line with stated long-term goals. In addition, the company confirmed its earnings guidance range of $2.62 to $2.72.
For those not familiar with the firm, Sigma-Aldrich technically is a chemicals company. However, it serves life science companies, universities, hospitals and others in the healthcare industry by providing chemical products and kits that are used in scientific, genomic, pharmaceutical and biotech research. In other words, it provides tools and consumable raw materials to scientists working at Merck (NYSE:MRK), Abbott Labs (NYSE:ABT), Lifepoint Hospitals (Nasdaq:LPNT) or Biogen Idec (Nasdaq:BIIB). On October 28, Sigma-Aldrich announced the launch of its TransPlex Whole Transcriptome Amplification (WTA2) technology. According to the company, WTA2 is a sensitive, fast and robust method of amplifying total RNA from various tissue sources. This method will help genomics researchers who work with samples of limited quantity and quality. (To evaluate what this means for investors, read A Checklist for Successful Medical Technology Investment.)
A well-renowned potential client list is just the tip of the iceberg as Sigma-Aldrich, which boasts 80,000 customer accounts in 36 countries. It also sells an astounding 130,000 products comprised of 400,000 stock-keeping units (SKU) and demonstrates impressive geographic, customer and supplier diversity that keeps one region or party from imposing too much control over its operations. As Mike Hogan alluded, these are the key ingredients that make Sigma-Aldrich relatively resistant to recession.
Cash Flow
In addition to the stable business model, Sigma-Aldrich is quite profitable. Third quarter net margins came in at 15% and should only increase as management has plans to boost margins by 150 basis points by 2010. It is, however, keeping the specific details of how it intends to do this tightly under wraps, although the company has stated intentions to "accelerate, elevate and innovate" its business and, in the process, boost cash flow production. Sigma-Aldrich has used its profits to reinvest into the business, repurchase $291 million in stock and pay a 13% higher quarterly dividend.
The Bottom Line
I have kept an eye on Sigma-Aldrich's stock as a potential investment for some time. Its valuation typically has been too rich for my blood, but overall market malaise has pushed the current P/E ratio to a very reasonable 14 times 2008 full-year projections. The P/E numbers represent a five-year low and I would jump at the opportunity if it weren't for the presence of even better deals in the market right now. Big pharma comes to mind, with industry giants such as GlaxoSmithKline (NYSE:GSK) at 10 times earnings and medical device titan Medtronic (NYSE:MDT) with a forward P/E of under 12. Yet, with downside protection a major theme in the markets these days, it's hard to think of a safer play than Sigma-Aldrich.
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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