2 for Tuesday: Sign on for Growth at Sigma-Aldrich

Hospitals, pharmaceutical companies and clinicians who seek and develop treatments for serious illnesses all need top-notch research tools and diagnostic equipment. That's where companies like Sigma-Aldrich (SIAL Quote) come into the picture.

This St. Louis-based company makes specialty chemicals and reagents used in drug development and disease diagnosis. Based on strong demand for its products, I think the stock is worth a look.

Actually, several things about the company intrigue me.

For starters, the long-term demand for research tools and products is strong and only should strengthen as our nation ages.

Plus, the company is expected to generate roughly $80 million in Web sales in 2001. That's about double what it did last year. Although management hasn't quantified its Web expectations in 2002, several analysts are expecting this high-margin business to double once again.

According to Sigma-Aldrich's proxy, which was filed March 28, 2001, the company's officers and directors own roughly 1.4 million shares combined. That's only about 2% of the outstanding shares. But it's worth mentioning because management's equity ownership is significant in proportion to its average base salaries, which range from roughly $245,000 to $625,000. The average officer maintains between roughly one and three times his or her average income in common stock. My point? Management's significant involvement in the stock gives the bosses a personal incentive to enhance shareholder value.

The Stats
Year	Revenue (in billions)	EPS
1999	$1.061	$1.45
2000	1.096	1.73
2001*	1.177	1.87
2002*	1.267	2.13
*Thomson Financial/First Call estimates. Source: Company reports

The company has prepaid for its growth. In 2001, Sigma-Aldrich made roughly $100 million in capital expenditures to build out its production, research and distribution facilities. But for both 2002 and 2003, total capex is expected to drop to $60 million a year. With even modest revenue growth, the company should be able to post at least a double-digit improvement in earnings each year.

According to consensus estimates, Sigma-Aldrich is expected to earn $2.13 a share in 2002. That implies a 13.9% rate of growth over its expected 2001 earnings of $1.87 a share. Its fourth-quarter earnings are slated to be released Feb. 12 after the market's close. The average consensus estimate for the December quarter is 44 cents a share.

Under a December 1999 share-repurchase program, Sigma-Aldrich has bought back more than 29 million shares at an average cost of $31.97 a share. In addition, its board of directors authorized an additional buyback on Nov. 13 of up to 5 million shares. That's a terrific sign that even better times lie ahead.

The Stock Sigma-Aldrich (SIAL:Nasdaq)
Recent Stock Price:	$42.22
52-Week Range:	$36.25-$51.49
P/E Ratio:	23.20
Market Capitalization:	$3.11 billion
Float:	46.2 million shares
Short Interest Ratio:	2.88
Institutional Ownership:	83%
Source: Yahoo! Finance

Over the next five years, both the company and Wall Street think Sigma-Aldrich can grow its earnings at a 12% clip or better. Over the same time frame, the industry is expected to grow at roughly a 9.7% clip. Sigma-Aldrich's ability to rein in expenses and drive revenue growth is the reason it's expected to outpace the industry.

Bottom line: Sigma-Aldrich is engaged in a growing industry. As demand for its research tools continues to perk up, I expect that the stock will react in kind. Realistically, given the above earnings projections, I think the shares could easily trade north of $50 within the next 12 to 24 months. That equates to about a 20% rate of return. The stock closed Monday at $42.22.

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