Why Sigma Pharmaceutical Limited shares have gone gangbusters today

The shares of Sigma Pharmaceutical Limited (ASX: SIP) have rocketed higher by over 12% this morning following the release of a strong half year result which revealed an impressive 28.1% increase in underlying revenue to $2.15 billion.

The leading Australian full line pharmacy wholesale and distribution company posted underlying earnings before interest and tax growth of 17% to $48.4 million, well ahead of its revised guidance of at least 10% EBIT growth outlined in an update released to the market back in May.

This strong performance has given management the confidence to upgrade its FY 2017 earnings growth expectations to 10%.

Sigma’s CEO and Managing Director Mark Hooper had this to say on the results:

“The momentum that built through the half has exceeded expectations. To deliver underlying earnings growth of 17%, is outstanding, and the momentum has carried through into year to date performance. The growth has been sustained and has been delivered across the board, from both market share growth and other general services income growth.”

Driving the result was a strong performance across its numerous pharmacy brands which include Amcal, Guardian, and Chemist King. Management advised that like-for-like sales across the company were up 7.2% in the first half.

Interestingly Sigma has followed many other Australian companies and turned to the China market for growth. It has launched an online Amcal store in China which to date has exceeded all expectations. Although it is early days, management is very optimistic and believes it provides considerable scope for expansion.

This is definitely what the company needs in my view. Whilst this result was undoubtedly impressive and the company does have potentially good growth prospects, the plans that Ramsay Health Care Limited (ASX: RHC) have for expanding into the local pharmacy market could be a cause for concern.

Ramsay’s expansion is likely to lead to increased competition for Sigma and rival Australian Pharmaceutical Industries Ltd (ASX: API), which could put pressure on Sigma’s incredibly slender EBIT margin of 2.25%.

It is for this reason that I would resist an investment in Sigma today and instead focus on other companies with wider margins such as Ramsay.

Alternatively, these three fantastic shares could be even better investments.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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