Schlumberger manages its business through twenty-eight "GeoMarket" regions, which are grouped into four geographic areas: North America; Latin America; Europe, the Commonwealth of Independent States, and Africa; and the Middle East and Asia. The GeoMarket structure provides a single point of contact at the local level for field operations and brings together geographically focused teams to meet local needs and deliver customized solutions.
The company had an event-driven FY2010, with the $11 billion acquisition of oil services giant Smith International, a transaction completed against the backdrop of the BP Gulf disaster, which attenuated offsh.o.r.e drilling at least temporarily. The Smith acquisition adds a line of supplies, including fluids and drill bits, in addition to traditional oilfield services and supply chain offerings to round out, expand, and leverage the existing Schlumberger business.
Financial Highlights, Fiscal Year 2010
Schlumberger"s 2010 results reflect the fortunes of the oil exploration and production industry, which in turn reflect the fortunes of petroleum products demand and prices. Revenues rose from $22.7 billion in 2009 to $27 billion, but this largely reflects the Smith acquisition, which will add approximately $8.5 billion to the top line ongoing. The bottom line remained at a somewhat soft $2.70 per share for the year, but improved oil demand and prices have improved capacity utilization, and together with the Smith integration, earnings are expected back to $3.70 per share range in FY2011.
Reasons to Buy
The first page of Schlumberger"s 2009 annual report begins with: "The age of easy oil is over." Written many months before the explosion of BP"s deepwater platform in the Gulf of Mexico and the ensuing spill, the sentence seems prescient and is perhaps the most succinct statement of Schlumberger"s advantages in the E&P business. Its expertise is most valuable in the most technically challenging projects, such as the several recent sub-salt offsh.o.r.e finds in Brazil, West Africa, and the Gulf of Mexico.
Unlike a lot of players in the oil business, it has been prudent with its money. Income from the boom years has been used to fund selected acquisitions of companies that operate only in its core business segment. It has also plowed money back into the company in the form of increased spending on R&D; Schlumberger invests more each year in R&D than all other oilfield services companies combined. The company has also started to return some cash to shareholders in the form of dividends and share buybacks. The dividend was raised 19 percent in early 2011, and we"ll see how fast it retires the 176 million shares issued for the Smith acquisition.
Reasons for Caution
Naturally, Schlumberger is vulnerable to the ups and downs of the oil and gas industry, and the BP disaster highlights an additional risk factor for offsh.o.r.e drilling projects, in addition to the geopolitical risks the company is already exposed to. The company paid a pretty stiff price for the Smith acquisition and the success of that acquisition will depend on how much operating leverage the company can achieve. And, if already-soft natural gas prices take another dip, abandonments and postponements of drilling projects could hurt. Finally, the share price has already taken a strengthening energy market into account, so new investors will have to watch closely for worthwhile entry points.
AGGRESSIVE GROWTH.
Sigma-Aldrich Corporation
Ticker symbol: SIAL (NASDAQ) S&P rating: A Value Line financial strength rating: A Current yield: 1.2%
Company Profile
Sigma-Aldrich is a manufacturer and reseller of high value-add chemicals, biochemicals, laboratory equipment, and consumables used in research and large-scale manufacturing activities. The company sells over 130,000 chemicals, over one-third of which it manufactures internally. It also stocks over 40,000 laboratory equipment items. Most of the company"s 92,000 customer accounts are research inst.i.tutions that use basic laboratory essentials like solvents, reagents, and other supplies. The company also sells chemicals in large quant.i.ties to pharmaceutical companies, but no single account provided more than 2 percent of Sigma-Aldrich"s total sales in 2009. Sigma-Aldrich"s business model is to provide its generic and specialized products with expedited (in most cases, next day) delivery. The company sells in 165 countries and obtains about 64 percent of its sales internationally.
Sigma-Aldrich operates four business units, each catering to a separate cla.s.s of customer and product. Research Essentials sells common lab chemicals and supplies such as biological buffers, cell culture reagents, biochemicals, solvents, reagents, and other lab kits to customers in all sectors. Research Specialties sells organic chemicals, biochemicals, a.n.a.lytical reagents, chromatography consumables, reference materials, and high-purity products. Research Biotech provides "first to market products" to high-end biotech labs, selling immunochemical, molecular biology, cell signaling, genomic, and neuroscience biochemicals. Fine Chemicals fills large-scale orders of organic chemicals and biochemicals used for production in the pharmaceutical, biotechnology, and the high-tech electronics industry.
The company"s biochemical and organic chemical products and kits are used in scientific and genomic research, biotechnology, pharmaceutical development, the diagnosis of disease, and as key components in pharmaceutical and other high technology manufacturing. Sigma-Aldrich has customers in life science companies, university and government inst.i.tutions, hospitals, and industry.
Financial Highlights, Fiscal Year 2010
Despite a slight softening in Q4, Sigma"s FY2010 revenues came in at $2.3 billion, a 7 percent improvement from a soft but not disastrous FY2009. Earnings improved from $2.80 to $3.12 per share, a little shy of the $3.20 some were expecting. For FY2011 the company sees mid-single-digit top line growth with earnings, boosted by gradual operating margin improvements, rising to $3.45 to $3.60 per share. The company continues to post strong financials, with a healthy $569 million in cash and only $300 million in long-term debt, less than 13 percent of total capital. Many feel the company will add some synergistic acquisitions, especially in key international markets. The company continues to grow its e-commerce capability and (via acquisition of a software company) now has the industry"s largest searchable database of over 60 million different chemical compounds.
Reasons to Buy
Sigma has been a very steady performer in a high value-add segment of the chemical and health care business. The company is big enough and broad enough to maintain its top-dog position in this lucrative niche, and has a good brand and sterling reputation both in domestic and international markets. For investors, it is a safe, steady grower in a solid business in a solid industry.
Reasons for Caution
The company"s growth is tied to the state of research in the chemical and bio/pharmaceutical industries, and, while steady, economic and political factors can create doubts from time to time. Rapid growth in existing businesses isn"t likely; when a company depends on acquisitions to grow, that brings some risks with it. While dividends have grown, a company in this industry with such a steady business and cash flow could pay out a little more to shareholders.
GROWTH AND INCOME.
J. M. Smucker Company
Ticker symbol: SJM (NYSE) S&P rating: NA Value Line financial strength rating: A+ Current yield: 2.6%
Company Profile
If you happened to think of a nice jar of refreshing purple grape jam when you heard the name "Smucker" you were on the right track. This eastern Ohiobased firm has been a leading manufacturer of jams, jellies, and other processed foods for years, and thanks in large part to divest.i.tures from the Procter & Gamble food division and other companies, has grown itself into a premier player in the packaged food industry.
Smucker manufactures and markets products under its own name, as well as under a number of other household names like Crisco, Folgers, Jif, Laura Scudder"s, Hungry Jack, Eagle, and Pillsbury, among others. The company also produces and distributes Dunkin" Donuts coffee and produces an a.s.sortment of cooking oils, toppings, juices, and baking ingredients. The company has had good success in revitalizing such brands as Folgers and Jif through improved marketing, channel relationships, and better overall focus on the success of these brands. Overall, the company aims to sell the number one brand in the various markets it serves. Operations are centered in the United States, Canada, and Europe.
Even as a $4.6-billion-a-year enterprise, the company still retains the feel of a family business, with brothers Tim and Richard Smucker sharing the CEO responsibilities as chairman and president respectively.
Financial Highlights, Fiscal Year 2009 (ended April 30, 2010)
In June 2010, the company announced better-than-expected results for the fiscal year ended April 30, a surprise to many investors who were expecting a relatively tough year with compet.i.tion and increased prices for certain commodities. That trend continued into the first quarters of FY2011. Led by improved sales in the U.S. retail coffee business, top line revenues actually grew, while many a.n.a.lysts had expected a modest decline as consumers had pulled back from buying premium brands. Performance in the relatively new coffee businesses exceeded expectations, and lower prices for certain commodities actually helped. The company was able to increase cash flow in FY2010 and increase the dividend some 14 percent. Expectations for FY2011 are for more of the same.
Reasons to Buy
In fact, Smucker has raised dividends every year since 2002, and seems on track to continue that trend. This is a very well-managed company with an excellent reputation in its markets. In recent years, it has a proven track record in buying and revitalizing key brands, the most prominent being former Procter & Gamble food brands and International Multifoods brands. We expect this trend to continue. Additionally, the company is trying out new initiatives for packaging and delivering foods, including "jar-free" peanut b.u.t.ter and healthier fare in certain categories, which should add to its compet.i.tive lead and to margins. Finally, the company is in a very steady and safe business, and will continue to enjoy a dominant marketing position and opportunities to improve margins in most of its businesses.
Reasons for Caution
In the food business, one must always keep an eye on raw commodity costs, as we learned with regard to corn, wheat, and other commodities in 2008. It appears that we may be headed for another such cycle, although perhaps not to the same degree. While the brands are strong, companies like Smucker must always worry about generic compet.i.tion and the increased buying power of mega-channel players like Wal-Mart. Future earnings could be attenuated somewhat by advertising spending and other costs.
GROWTH AND INCOME.
Southern Company
Ticker symbol: SO (NYSE) S&P rating: A Value Line financial strength rating: A Current yield: 4.8%
Company Profile
Through its four primary operating subsidiariesGeorgia Power, Alabama Power, Mississippi Power, and Gulf PowerSouthern Company serves some 4.4 million customers in a large area of Georgia, Alabama, Mississippi, northern Florida, and parts of the Carolinas. The company also wholesales power to other utilities in a wider area.