BCPC - Balchem Q3: A Solid Performer Is Seeing A Soft 2023

2023-10-27 16:56:23 ET

Summary

• Balchem Corporation shares have come under pressure after a tough 2023 so far.
• The company has a strong track record and has grown its sales to nearly a billion dollars.
• Recent Balchem Corporation Q3 financial results show a decline in growth and weakness in the animal nutrition & health business, but I still have high regards for the business (over the long haul).

In the summer of 2022, I believed that Balchem Corporation ( BCPC ) was making another solid move on the M&A road again. I called Balchem a long-term winner, driven by sound capital allocation skills and a strong positioning of the business.

I liked the business from an operational point of view, but believed that valuations remained a bit too demanding in order to get involved. Fast-forwarding to the fall of 2023, Balchem shares have lost about ten percent of their value. This is for good reasons, as a traditional strong performer has seen a tough 2023 so far, even as leverage has come down a long way already.

Some Perspective

Balchem Corporation has been in business for over 50 years. Over time, it has grown to become a conglomerate which is active with multiple divisions, as its business activities have dominant positions in niche market segments.

By 2017, when I started coverage on the business, the company had grown to report over half a billion in sales, generated from a human nutrition & health business, animal nutrition & health, specialty products and fracking solutions, with the latter being a small business which suffered from the implosion of the fracking boom.

The company had tripled sales in the decade before, driving shares higher from $15 in 2007 to $75. With investors loving the growth of this underrated conglomerate, shares traded at a demanding 30 times earnings multiple, based on earnings power around $2.50 per share at the time.

Forwarding from 2017, shares rallied to a high of $175 in 2021, before settling down to $125 per share in the summer of 2022. Since 2017, the company has seen continued growth, with 2021 revenues having advanced to $799 million, with adjusted earnings reported at $3.57 per share. Moreover, the balance sheet was in pristine shape, with net debt being minimal with EBITDA reported at around $200 million.

Furthermore, the company had seen a strong start to 2022, with first quarter sales up 23% to $229 million, while adjusted earnings rose by 17% to $1.03 per share. With earnings power trending at around $4 per share, the company traded at around 30 times earnings. Trading at a demanding multiple, Balchem announced a substantial $338 million deal for Norwegian-based Kappa Bioscience, a specialty manufacturer of vitamin K2. With a $53 million sales contribution, it was a bolt-on deal, albeit at an (upfront) expense.

Pro forma net debt of $420 million resulted in a leverage ratio around 2 times EBITDA. While I believed that the company demanded a premium multiple, a 30 times earnings multiple looked far too demanding in order to create a nice entry opportunity, despite the strong track record of the business.

Coming Down

In the roughly fifteen-month period since I last took a look at Balchem shares, which traded at $125 at the time, have largely traded in a $120-$140 range, although they have fallen to a low of $114 per share here.

In February of this year, Balchem posted its 2022 results. Revenues rose by nearly 18% to $942 million, although that revenue growth slowed down to 9% in the final quarter. By now, the company is organized under three segments. Human nutrition & health is the largest business, with $527 million in sales. Animal nutrition & health is the second-largest segment, with $262 million in sales. Specialty products is the smallest segment, with revenues of $131 million, albeit that also it is the most profitable segment.

GAAP operating profits rose to $145 million as the company posted an adjusted EBITDA number of $216 million, making that leverage ratios are in check. The company posted a GAAP earnings number of $3.25 per share and adjusted earnings at $4.03 per share, in line with my estimate over the summer, as the adjustments between both earnings numbers looked quite fair. Somewhat problematic is a mere 9% increase in fourth quarter sales to $232 million, and an eleven cents increase in adjusted earnings to $0.94 per share, both of which looked soft given the announced deal.

2023 So Far

In April, Balchem posted relative soft first quarter results, with revenues up just 1% and change to $232 million. The near standstill in growth made that earnings took a beating, with adjusted earnings down nine cents to $0.94 per share. This, of course, was disappointing amidst a more uncertain economic environment.

In July, second quarter sales were reported at $231 million, down 2% on the year before, despite the contribution purchase of the vitamin K2 producer Kappa. Promising that despite the small decline in sales was that margins held up quite well, with adjusted earnings down just a penny to $1.06 per share. Adjusted EBITDA came in at $115 million in the first half of the year. With EBITDA trending at $230 million a year, while net debt was down to $360 million, leverage ratios quickly came down to just over one and a half times.

Towards the end of October 2023, Balchem posted softer third quarter results with revenues of $230 million being down nearly 6% on the year before amidst real weakness in the animal nutrition & health business. Despite the poor top line sales trends, the company actually managed to grow adjusted earnings per share by four cents to $1.04 per share. Aided by the strong earnings power, net debt has been lowered to $303 million, reducing leverage ratios to a manageable 1.3 times.

With earnings power pretty stable compared to the numbers of last year, Balchem is on track to post earnings around $4 per share, while revenues are largely flat. That said, recent weakness is a bit worrying, certainly in an inflationary environment, as the K2 deal no longer contributes to year-over-year gains (in the sense that its contribution started already this period last year).

What Now?

On the positive side, the modest decline in the Balchem Corporation share price has reduced the earnings multiple from about 30 times to 28 times, all while leverage has come down a bit. That looks compelling, given where interest rates are trading. With the pressure on the top line, I fail to get too upbeat as long as shares trade in their triple digits.

While I still like the long-term performance and positioning of Balchem Corporation, the stock performance is underwhelming over the past year. Still, considering Balchem to be a premium play over the long haul, I am at most willing to pay a low-twenty times multiple, only seeing real potential if shares fall further to levels in the $90s.

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