Sigma-Aldrich: Risk-Reward Even - Analyst Blog

On May 9, we issued an updated research report on lab chemical and life sciences company Sigma-Aldrich SIAL. While the company should gain from acquisitions and expansion initiatives, it faces persistent challenges in its research business and currency headwinds.

Sigma-Aldrich, a Zacks Rank #3 (Hold) stock, reported mixed first-quarter 2014 results on Apr 24 with adjusted earnings topping the Zacks Consensus Estimate while sales missing the same. Profit rose year over year as weakness in the company's research business was offset by gains in other areas. Sigma-Aldrich reaffirmed its sales and earnings guidance for 2014.

Sigma-Aldrich's significant investments in sales, marketing and R&D initiatives are generating demand for its products. The company is seeking to take advantage of country-specific opportunities by expanding its presence in high-growth emerging markets. It is actively expanding its foothold in the Asia-Pacific region, especially in the fast-growing emerging markets of India and China.
 
The BioReliance acquisition, which extended Sigma-Aldrich's reach into the promising new market of biologic drugs, should add to its growth in 2014. The company has also taken up cost control and plant process improvement measures and is effectively managing its working capital, contributing to healthy free cash flow generation.
 
Moreover, Sigma-Aldrich remains committed to offering returns to its shareholders through dividends and share repurchases. The company, in Feb 2014, announced a 7% hike in its quarterly dividend to 23 cents per share.  
 
However, Sigma-Aldrich's research business, especially with large pharmaceutical companies, is expected to continue to face challenges due to weak academic spending in the U.S. and Europe. Uncertainty surrounding academic funding (in particular in the U.S. due to sequestration) is expected to sustain through first-half 2014.

Sigma-Aldrich's SAFC Hitech business also remains under pressure with continued decline in sales. Weak pricing for LED precursors continues to weigh on this business. The company expects Hitech sales to decline in the low double-digits for the balance of 2014.

Moreover, Sigma-Aldrich, which generates a major chunk of its revenues from overseas markets, remains exposed to currency headwinds.

Key Picks from the Sector

Other companies in the specialty chemicals space with favorable Zacks Rank include International Flavors & Fragrances Inc. IFF, Sensient Technologies Corporation SXT and Zep, Inc. ZEP with all holding a Zacks Rank #2 (Buy).