We are maintaining our Neutral recommendation on lab chemical and life sciences company Sigma-Aldrich Corporation (SIAL). While the company may gain from acquisitions and expansion initiatives, we remain on the sidelines considering currency headwind and continued challenges in its research business.
Sigma-Aldrich’s second-quarter 2013 revenues and adjusted earnings, reported on Jul 23, beat Zacks Consensus Estimates. The company saw organic sales gain across all business units in the quarter. While Sigma-Aldrich backed its sales growth guidance for 2013, it cut its earnings forecast citing incremental currency headwind.
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 2013. The company also remains committed to offering returns to its shareholders through cash dividends and share repurchases. Sigma-Aldrich returned $108 million to its shareholders in first-half 2013 in form of dividends and share repurchases.
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. The company expects uncertainty surrounding academic funding (in particular in the U.S. due to sequestration) to sustain through the balance of 2013.
Moreover, Sigma-Aldrich, which generates roughly 67% of its sales from the overseas markets, is highly exposed to currency headwinds. The company has reduced its earnings outlook for 2013 factoring in the incremental foreign exchange headwind. Earnings headwind is now expected to be 10 cents per share for the year versus 5 cents expected earlier.
Other Stocks to Consider
Other companies in the specialty chemical space with favorable Zacks Rank are Ferro Corp. (FOE), Quaker Chemical Corp. (KWR) and Sensient Technologies Corp. (SXT). All of them retain a Zacks Rank #2 (Buy).
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