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Growth & Income

Sigma-Aldrich (SIAL - Analyst Report) recently reported another strong quarter driven by solid organic sales growth and gross margin expansion. It was the company's fifth consecutive positive earnings surprise.

Management also raised its guidance for the remainder of 2010, prompting analysts to raise their estimates. Despite a run up in share price recently, the stock is reasonably valued. It is a Zacks #2 Rank (Buy) stock.

Company Description

Sigma-Aldrich develops, manufactures, and distributes a broad range of biochemicals, organic chemicals, chromatography products and diagnostic reagents for various life science and high technology purposes.

The company operates in two main segments: Research Products and SAFC (fine chemicals). Sales for the most recent quarter were divided as follows:

Research Products: 70%
SAFC: 30%

Over 60% of sales come from outside of the U.S.

Third Quarter Results

Sigma-Aldrich reported third quarter results on October 21. Earnings per share was $0.83, beating the Zacks Consensus Estimate of $0.73 by 14%. It was a 19% increase over the same quarter in 2009.

Organic sales in the third quarter grew by 7%, excluding exchange rates effects. The company's Research segment saw top-line growth of 5%, driven by volume growth in each geographic region. Sales of Sigma-Aldrich's SAFC business jumped an impressive 14% reflecting stronger demand.

The gross margin improved from 49.6% to 52.9% due in part to a favorable product mix.

Outlook

Management raised its guidance for the remainder of 2010 following the strong third quarter. The company now expects earnings per share between $3.20 and $3.28, up from previous guidance of $3.05 to $3.20.

Analysts have been raising their estimates as a result of the increased guidance. The Zacks Consensus Estimate for 2010 EPS is $3.28, which is at the high end of management's guidance. This represents 17% EPS growth over 2009.

The 2011 Zacks Consensus Estimate is currently $3.54, an 8% increase of 2010 EPS.

Dividend

The company has steadily and consistently raised its dividend for years. Since 2000, the company has increased it at a 15% annual clip.

Sigma-Aldrich should have no problem continuing to raise its dividend as free cash flow in the third quarter increased 6% year-over-year, and management is forecasting over $360 million in free cash flow for the full year.

The stock has a dividend yield of 1.0%, and its payout ratio is just 20%.

Valuation

The stock has had a nice run up lately, however, valuation still remains within reason.

Shares trade at 19.4x forward earnings, a premium to the industry average of 15.1x. Its PEG ratio is around 2.0.

The stock trades at 4.0x book value, also higher than the industry average, which is 2.1x. Its return on equity of 23.0% trumps the industry average of 5.9%, however, justifying the higher multiple.

Sigma-Aldrich is headquartered in St. Louis, Missouri. It has a market cap of $7.7 billion.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

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