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Synthesized Value

11/18/2005 12:00 am EST


Kelley Wright

Managing Editor, Investment Quality Trends

With a value-oriented approach that is based on dividend yield one might be surprised to see a biochemical & biotech firm among the buys at IQ Trends. Here, editor Kelley Wright explains the reasoning behind his recommendation for Sigma-Aldrich.

"Sigma-Aldrich (SIAL NASDAQ) creates and markets the world’s largest selection of biochemicals, organic chemicals, and chromatography products. Its Scientific Research unit is responsible for the production of organic and inorganic chemicals, as well as other analytic substances used in high tech research. In 2001, the company opened a new $55 million Life Science and High Technology center. Major research facilities are located in the US, UK, Switzerland, and Israel.

"Its product lines focus on biotech needs, including antibodies, enzymes, and nucleotides used in genomic research. Its chemical synthesis business is a global leader, producing the highest purity inorganics commercially available. Last year, nearly 70% of sales from this unit were made to non-profits, educational facilities, government institutions, and pharmaceutical firms.

"Biotechnology is the company’s second largest business unit. Biotechnology products include biochemicals and kits. These are used in genomic research, immunochemistry, cell culture, molecular biology, cell signaling, and neuroscience. In St. Louis, its large-scale Cell Culture facility is among the best in the world. It is also a major manufacturer of Cell Culture media buffers used in the production of human and animal vaccines.

"The firm’s Fine Chemicals unit is a top ten supplier of large-scale organic chemicals. Over 75% of its chemicals products are used as components for the diagnosis and treatment of disease. With no equal to the sourcing and production capabilities of Fine Chemicals, SIAL has found itself as the dominant supplier to companies in high tech and life science markets.

"SIAL recently surprised shareholders with the release of its third quarter results. The company noted revenues up 14%, and sales up 21%. The broad increases in result were attributable to strong sales, lower taxes, and beneficial changes in currency exchange rates. SIAL raised its earnings outlook for 2005 to the range of $3.75 to $3.85, well above what analysts were expecting.

"At a recent price of $64, Sigma Aldrich is priced to yield 1.2% and sits exactly at its level of historic Undervalue. Though shares admittedly offer little in terms of broad yield, the company has maintained an exceptional rate of dividend increase. SIAL also maintains a tip-top balance sheet with only a long-term debt to equity rating of only 4%. From current levels we see a dividend payout ratio low enough to bolster future dividends, as well as increasing sales trends from customers around the world. Shares will continue to represent historic investment value up to a price of approximately $70 per share."

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