Sigma-Aldrich Group (SIAL) has announced plans to invest $2 million in expanding the production of trimethylgallium (TMG) at its Bromborough, Wirral, UK manufacturing plant. The investment is expected to establish Sigma as a leading global supplier of TMG, which has a growing demand in the production of high brightness light-emitting diode used in backlighting in flat panel television sets and for energy efficient lighting under its SAFC Hitech business segment.
The TMG plant expansion is a part of the annual business plan for 2010, which Sigma-Aldrich has recently. The business plan deals with the company’s long-term financial objectives. For the next five years, the company is anticipating an average growth of 7% to 8% in revenues (versus its prior guidance of 7%).
The growth in revenues reflect expectations for 3% to 4% developed market growth (U.S. and Europe), 1% contribution from emerging market expansion, 1.5% contribution from new products, 0.5% benefit from a greater focus on e-commerce penetration and sales force realignment to drive more customer-centric selling, and 1% contribution from its manufacturing oriented SAFC unit.
Sigma is expecting a 50 basis points improvement in its operating margin. Aggregate free cash flow is expected at an excess of $2 billion over the next five years. The company expects earnings per share of $4.60 in 2014.
However, we are skeptical about Sigma’s goal to achieve annual organic revenue growth target over the five-year period, given the challenging end-market condition. Although the traditional, small molecule pharmaceutical research and development spending is expected to improve in 2010, we do not expect a significant improvement.
Weak spending from major pharmaceutical and biotech customers will affect growth in Sigma’s Research Biotechnology segment. Additionally, we believe that premium life science reagent markets are intensely competitive and Sigma’s commercial organization may still be too small, even after the recent expansion in the division.
Sigma is increasing its product prices by 2% to 3% annually. The company expects to achieve sales growth in the low single digits and to deliver EPS slightly in excess of $2.70, reflecting a gain over last year’s $2.65.
Sigma expects its Research Essential segment products used for cell biology and analytical chemistry and the products offered under the SAFC Bioscience segment to drive growth. The company expects a small contribution by supplying key components to H1N1 vaccine-manufacturing customers and from a slight increase in government research funding. We believe Sigma’s ability to continually effect pure price increases in its core research businesses is enabled by its integrated ERP platform, which allows it to quickly implement pricing strategies in response to changing market conditions.
Sigma-Aldrich is a top-tier brand in the life science tools industry, with a strong financial flexibility. Sigma is expanding its presence in the emerging markets of China, Brazil and India . We believe that the expansion of its agreement with Sangamo BioSciences to use zinc finger technology, its partnership with the Michael J. Fox Foundation and its acquisition of ChemNavigator offer strong growth opportunities in small but rapidly growing markets. However, foreign currency headwinds as well as softer demand conditions and poor visibility in the end-markets are major concerns. Hence, we maintain our Neutral recommendation on Sigma-Aldrich.
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