Sigma-Aldrich Retained at Neutral (BAYRY) (SIAL)

We are retaining our Neutral recommendation on global lab chemical and life sciences company Sigma-Aldrich Corporation (SIAL). Its third-quarter 2012 earnings of 94 cents a share matched the Zacks Consensus Estimate. Currency headwinds dragged down the company’s profit in the quarter.

Revenues edged up 2% year over year to $639 million, but trailed the Zacks Consensus Estimate of $661 million. Sigma-Aldrich registered healthy growth in its Fine Chemicals (SAFC) division in the quarter, boosted by the new Taiwan facility. Revenues from Research Chemicals segment fell on a reported basis given the weakness across the U.S. and European markets.

The company reaffirmed its earnings guidance for 2012. Sales from its Research Chemicals unit are expected to grow in the low single-digit clip organically in the fourth quarter. Revenues from the SAFC business is expected to grow in the mid-to-high single-digits in the quarter.

Sigma-Aldrich’s significant investments in sales, marketing and R&D initiatives are generating demand for its products. The company remains committed to ramp up marketing, business development and R&D to boost growth.

Moreover, Sigma Aldrich is seeking to take advantage of country-specific opportunities by expanding its presence in high-growth emerging markets. The company is actively expanding its foothold in the Asia-Pacific region, especially in the fast-growing emerging markets such as India and China. As part of this move, the company recently entered the South Korean biopharmaceutical market through an agreement with Seoul-based CrystalGenomics.

The company is also pursuing a number of initiatives to expand its biology and chemistry product portfolio. Its distribution agreement with AB Sciex for mass spectrometry-based tagging chemistries represents a part of these efforts.

Sigma Aldrich’s recent acquisitions are expected to add to its growth in 2012. The BioReliance acquisition extends its reach into the promising new market of biologic drugs. Moreover, the purchase of Research Organics is expected to boost the company’s buffer production capacity and expand its pharmaceutical grade portfolio of raw materials. Sigma-Aldrich also remains committed to offering returns to its shareholders through cash dividends and share repurchases.

However, the company’s research business, especially with large pharmaceutical companies, is expected to continue face economic challenges given the uncertainties across the U.S. and Europe. Its research sales remain affected by the funding uncertainties in the U.S. due to budget constraints. The pharmaceutical end market has been challenged by facility consolidations and closures.

Moreover, unfavorable currency exchange translation may continue to weigh on its earnings. Sigma expects negative currency impact on earnings to be modestly below 25 cents a share for full-year 2012.

Sigma-Aldrich, a close peer of Bayer AG (BAYRY), maintains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.