Siegfried's Stock Will Move When It Integrates BASF Unit

| About: Siegfried Holdings (SGFEF)

Summary

Siegfried Holdings is a generic drug manufacturer.

The stock has done well since 2011 and should continue to grow.

Siegfried purchased a BASF unit in 2015.

Siegfried Holdings (OTC:SGFEF) is a Swiss based manufacturer of generic pharmaceuticals. The company bought BASF's generics division last year and has been busy integrating the unit into the company. Since 2011, Siegfried has put up great growth number and the stock price has responded in kind. If management can cut costs through synergies, the stock price should keep going.

The company has 4.15 million shares and trades at a market cap of CHF768.58 million ($792.53 million). It takes $1.03 to buy one Swiss franc. The dividend was increased from CHF1.50 to CHF1.80 and now the stock yields 0.97%. Diluted earnings per share are CHF9.76 and the stock trades at a price to earnings ratio of 19.

Sales are CHF480.6 million ($495 million) and Ebitda CHF43.4 million ($44.74 million). The Ebitda margin is a respectable 16%. The profit margin is 8%. Some of these numbers are down due to the strong euro and integration of the BASF unit.

The BASF deal was financed by replacing a CHF250 million ($257 million) bond with a CHF400 million ($412 million) offering. Two convertible bonds in the amount of CHF160 million ($165 million) were issued as well. The balance sheet shows CHF257 million ($265 million) in inventories, CHF47 million ($48.5 million) in cash, and CHF124 million ($128 million) in accounts receivable. The liability side shows CHF64.7 million ($66.7 million) in accounts payable and CHF215 million ($221.6 million) in debt.

Siegfried has put up some great numbers since 2011. In 2011, the share count was 3.8 million and now, 4.15 million. The dividend was CHF1 and now CHF1.8. Diluted earnings per share were CHF2.55 and now 9.76. The stock price ended 2011 at CHF89.8 and ended 2015 at CHF195.7. You can see why we own this stock. In a previous article, I discussed many of the generics that Siegfried manufactures. Lots of pain killers and anti-depressants that are off patent.

In 2015, there was a CHF95 million ($98 million) increase in property, plant, and equipment. In 2014, the increase was CHF82 million ($84.5 million). Free cash flow has been negative with the many acquisitions that Siegfried has undertaken. What will probably move the stock is when there is a year with no acquisitions and a nice big free cash flow.

Free cash flow was 8.4% of sales in 2011, 10.% in 2012, and 6.3% in 2013. If Siegfried could produce 5% of CHF480.6 million ($495 million), it would be CHF24 million ($24.8 million). That would be a free cash flow yield of 3%, which is nothing special. If management could make some big cost cuts and double that free cash flow and then some, the stock will move. That is what we are hoping for and why we own shares.

Disclosure: I am/we are long SGFEF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.