Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies with a Low Beta.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Sigma-Aldrich Corp (SIAL)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Sigma-Aldrich Corporation is a life science and high technology company. The Company develops, manufactures, purchases and distributes the range of chemicals, biochemicals and equipment available globally and also provides global biopharmaceutical testing services. These chemical products, kits and services are used in scientific research, including genomic and proteomic research, biotechnology, pharmaceutical development and as key components in pharmaceutical, diagnostic and other high technology manufacturing. As of December 31, 2012, the Company offered approximately 45,000 equipment products. On January 31, 2012, the Company completed its acquisition of all of interest of BioReliance, a provider of global biopharmaceutical testing services. On April 2, 2012, the Company acquired Research Organics, a supplier of purity biochemicals.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$57.62|
|Value Based on 0% Growth||$33.78|
|Market Implied Growth Rate||8.18%|
|Net Current Asset Value (NCAV)||$8.91|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Sigma-Aldrich is suitable for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor has concerns about the high price-to-earnings ratio and the high price-to-book ratio, but the company passes all of the Enterprising Investors requirements. Â As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Agilent Technologies (A) and ModernGraham’s valuation of Waters Corporation (WAT). Â From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.77Â in 2010 to only an estimated $3.97 for 2014. Â This level of demonstrated growthÂ does not supportÂ the market’s implied estimate of 8.18% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value that is belowÂ the current price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Sigma-Aldrich (SIAL)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Sigma-Aldrich (SIAL) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.