Wednesday, August 31, 2016

1st AIM Student Equity Update of the 2016 Fall by Andy Krueger. Balchem Corp (BCPC) "Record Quarter Just the Beginning for Balchem?"

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. 


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.

What has the stock done lately? 

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.