Balchem
Corporation (BCPC, $68.61) “Record Quarter Just the Beginning for
Balchem?”
By: Andy Krueger, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by myself,
and it expresses my own opinions. I am not receiving compensation for it and I
have no business
relationship with any company whose stock is mentioned in this article.
Summary
• Balchem Corporation (NASDAQ:BCPC) develops, produces, and
sells specialty performance ingredients for the food, feed, and medical
sterilization industries in the United States, China, Japan, Germany, United
Kingdom, France, India, and Italy.
• VitaCholine, BCPC’s brand of choline supplements, received a
favorable ruling from the FDA who now recognizes choline as an essential
nutrient.
• Cost and sales synergy expectations for the integration of Albion
International, Inc. remain on track.
Management is pleased with the response from BCPC’s customer base and Albion’s
contribution to the business model.
• A significant fire in one of BCPC’s five chelated mineral plants
is forcing the company to leverage their other 20 manufacturing plants as well
as outside partners to ensure minimal disruption to the customer base.
• Despite the 7.8% decrease in Animal Nutrition & Health
segment sales, management remains optimistic regarding the segment’s
performance for the remainder of the year as dairy economics are showing signs
of recovery.
• BCPC is hovering near the 52-week high of $70.91 and could be
poised to break through after producing a record-setting quarter, despite
battling significant headwinds in the oil and gas industry, as well as poor
dairy economics.
Key
points: Traction for BCPC’s VitaCholine line of
supplementation is increasing domestically and internationally. In addition to the FDA recognizing choline as
an essential nutrient, the European Food Safety Authority (EFSA) released
results of a multinational study that showed choline intakes across Europe are
too low. As a result, management
expects modest organic growth until mid-2018 when choline daily values will be
required on labels and BCPC will see a large spike in revenue from VitaCholine.
The acquisition of
Albion International, Inc. for $111.5mm in cash on February 1, 2016, expands
BCPC’s portfolio of nutrition products by adding over 100 patents of organic
mineral compounds for both human and plant nutrition. BCPC will increase its geographical footprint
and define the combined company as a technological leader in spray-drying and
ingredient delivery solutions. BCPC
already posted record-setting sales ($74.8mm) in the second quarter for the Human
Nutrition & Health segment on the back of the Albion acquisition.
The damage from the
July 25 fire was significant, although no lives were lost in the incident. BCPC is fully insured on the facility and
owns business interruption insurance to cover any lost income; no material
impact on the company’s bottom line is expected at this point.
A decline in milk
prices caused a decline in sales of AminoShure and NitroShure, however, the
USDA has since increased the milk price forecast for the rest of 2016 and all
of 2017 citing improving demand for dairy products both domestically and
internationally. As dairy economics
continue to improve, BCPC expects their customers to increase purchases of
various nutrients for their feed.
Since the acquisition
of Albion International in February, Balchem has seen share price increase 21%. BCPC’s Q2 results saw a record high non-GAAP
net earnings of $21.1mm ($0.66 per share).
BCPC is also generating record high amounts of cash, which will remain
essential as the $288.7mm of long-term debt comes due. BCPC is trading at 26.6x on a P/E valuation,
which is above its historical average of 23.6x P/E, and the company will need
to show investors a continued plan for growth if it hopes to convince them to hold
on to their investments. Any positive
data from the FDA regarding the Phase III clinical trial for the Curemark drug
that will be used in the treatment of autism would largely convince investors
BCPC is worth the price.
Past
Year Performance: BCPC share price increased 18.74% over the past year; although, it
has been far from a comfortable ride.
Investors saw the stock price close at $68.88 on December 4, 2015, only
to find the stock trading at a 52-week low of $53.11 roughly one month later on
January 20, 2016. Investor sorrows were
short-lived as the stock was back up to $65 just two weeks later following the
announcement of the Albion acquisition. Despite
the large loss in share value during December and January, BCPC managed to put
together an impressive performance over the last year.
Source: FactSet
My
Takeaway
Despite the
macroeconomic headwinds facing BCPC, I believe the company can continue to post
solid earnings as the impact from the headwinds lessens. The news from the FDA and EFSA helped move
the stock to near 52-week highs with the potential for more positive news
coming from the Phase III trial for BCPC’s autism drug. Although no timetable for the trial has been
made public, patients must only take the drug for 90-days before the effects
can be studied, and a few patients have already begun their 90-day trails. Regardless of the fact BCPC is above its
historical P/E average, I think it is worth holding the stock to wait for news
regarding the autism trial and the large increase in revenues BCPC will see in
mid-2018 when choline levels are required on labels, so long as the company
continues to have solid cash generation to fund the interest payments on the
outstanding debt.
