Sigma: A return to profit, but not in the clear

The pharmaceutical wholesaler still has choppy waters to navigate

Scott Phillips (TMFGilla)

Scott Phillips is The Motley Fool’s Chief Investment Officer in Australia. He is Advisor of The Fool’s flagship investment service, Motley Fool Share Advisor and the Portfolio Manager of Motley Fool Everlasting Income and Premier Portfolio, as well as running our most premium service, Motley Fool Platinum. He is passionate about investing, having managed his own portfolio for over 15 years. A dyed-in-the-wool Fool (in the best way), he has been a member of The Motley Fool since 1999. Scott holds a Bachelor of Commerce (Management) and a Graduate Diploma of Accounting. Before joining The Fool, Scott worked in various Sales and Finance roles in industry, which has allowed him to see the good, bad and the ugly of corporate management close-up. Giving him a great understanding of the way businesses run – and what separates the business wheat from the chaff – Scott wholeheartedly agrees with Warren Buffett when he said he was a ‘better investor because I am a businessman and a better businessman because I am an investor’. Scott left a successful career to follow his passion – helping our members achieve the best possible investment returns, and helping Australians learn to better manage their money. It’s no surprise he ended up at The Motley Fool.

Published March 22, 2012 1:25 pm AEDT

Sigma Pharmaceutical Limited (ASX: SIP) today announced a return to full-year profit, after a tough few years. It booked a $49 million profit, after a loss of $235 million last year. Excluding discontinued operations, the company improved to a $50 million profit, up from a $73 million loss in the prior year.

We outlined some of the pharmacy wholesaler's recent problems last week, including overpaying for acquisitions, suffering the loss of Pfizer's drug distribution business (Pfizer is distributing its products direct to pharmacies, bypassing Sigma and the other wholesalers, including Australian Pharmaceutical Industries Ltd (ASX: API)) and most recently a strike at its Rowville distribution centre.

The company will pay a full-year dividend of 2 cents, and a special dividend of 1.5 cents, both fully-franked, capping a phoenix-like year for the company, with the shares rebounding from a low of $0.28 12 months ago to $0.645 in afternoon trade today.

That jump looks impressive – and it is, if you were lucky enough to buy shares at their lows. The shares are still down from a high of $0.89 they hit 2.5 years ago and an all-time high of $2.16 in 2005, so long term shareholders will appreciate the up-tick, but there's a long way to go before they are made whole.

Risks still abound – with the company highlighting the upcoming cuts to the Pharmaceutical Benefits Scheme and the chance that another major pharmaceutical supplier may follow Pfizer's lead and deliver its products directly.

The management team deserve plaudits for righting the ship, but there's still a long way to go before it's at cruising speed and under full sail – and a safe distance from the menacing rocks that are still well in sight.

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Scott Phillips is a Motley Fool investment analyst. You can follow him on Twitter @TMFGilla. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691)

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