BCPC - Balchem: Still Neutral Considering Both Q2 Results And Outlook

2023-07-31 15:48:23 ET

Summary

• Balchem Corporation's revenue for the second quarter of 2023 turned out to be below expectations, but its Q2 bottom line came in above the consensus estimate.
• In 2H 2023, Balchem is expected to witness revenue growth acceleration, but this might be negated by profit margin contraction.
• I stick with my Hold rating for Balchem, taking into account the company's Q2 2023 results and its 2H 2023 outlook.

Elevator Pitch

My rating for Balchem Corporation ( BCPC ) stock is a Hold. With my prior May 1, 2023 write-up , the focus was on BCPC's deleveraging efforts and the company's first quarter financials.

In this latest update, I review Balchem's most recent Q2 2023 financial results and evaluate the company's short-term prospects. In the second quarter, BCPC achieved an earnings beat, but its top line didn't meet the market's expectations. Looking ahead, Balchem is projected to record strong revenue expansion in 2H 2023, but its profitability in the second half of this year could be affected by an increase in depreciation expenses.

Balchem Corporation's results and outlook don't send a clear message that the stock is either a Strong Buy or a Strong Sell. Also, Balchem's current P/E multiple is close to its historical mean. As such, I am of the view that a Hold rating for Balchem is justified.

Analysts Were Initially Expecting Revenue Expansion And Earnings Contraction In Q2

Prior to the company's latest quarterly results release on July 28, 2023, the market was expecting BCPC to register higher sales and lower EPS on a QoQ basis for the second quarter of this year.

As per the sell-side's consensus financial projections, Balchem's top line was estimated to grow by +5.3% QoQ from $232.5 million for Q1 2023 to $244.9 million in Q2 2023. Separately, the analysts forecasted that the company's normalized EPS for the second quarter of the current year will be $0.93, which would have represented a -1.1% decline on QoQ terms as compared to its Q1 2023 bottom line of $0.94 per share.

Notably, BCPC's actual financial performance for the recent quarter was quite different from what Wall Street had initially expected. I will touch on Balchem's Q2 2023 financial results in the next section.

BCPC Reported Below-Expectations Top Line And Above-Expectations Bottom Line

Balchem revealed its Q2 2023 financial performance in an earnings press release issued on Friday July 28 before trading hours.

BCPC's top line decreased by -0.6% QoQ and -2.3% YoY to $231.3 million for the second quarter of 2023. More significantly, Balchem's actual revenue came in -5.6% below the analysts' consensus sales forecast of $244.9 million.

BCPC noted at its second quarter results call that "end market demand has continued to be volatile and we're yet to see a more broad-based recovery across our segments." This explains why Balchem's recent quarterly sales have fallen short of expectations. In fact, the company's Q2 2023 revenue would have been -$14 million lower, if not for the incremental top line contribution from M&As (Mergers & Acquisitions).

On the other hand, Balchem achieved a +14.0% earnings beat in the recent quarter, as its bottom line expanded by +12.8% QoQ from $0.94 in Q1 2023 to $1.06 for Q2 2023.

The company's above-expectations bottom line for the second quarter was driven by an improvement in profitability. Gross profit margin for BCPC increased from 30.4% for Q2 2022 and 31.5% for Q1 2023 to 33.4% in Q2 2023. Also, Balchem's normalized net income margin expanded by +1.7 percentage points QoQ and +0.3 percentage points YoY to 14.9% for the second quarter of the current year. BCPC attributed the company's margin expansion in Q2 to "higher prices, lower input costs and a favorable mix" at its second quarter earnings briefing.

Balchem's Near-Term Outlook

For the second half of this year, I expect BCPC's stronger pace of revenue expansion to be offset by profit margin contraction in line with Wall Street's consensus financial estimates.

Specifically, the analysts see Balchem reversing from a -2.3% YoY revenue contraction in Q2 2023 to deliver top line expansion rates of +4.3% and +11.3% for Q3 2023 and Q4 2023, respectively on a YoY basis. But BCPC's normalized net profit margin is forecasted to decline from 14.9% in Q2 2023 to 14.5% and 14.4% for Q3 2023 and Q4 2023, respectively.

The company's VitaCholine product, which it refers to as "the gold standard in choline salts" used "in infant formula, prenatal multivitamins, fortified food," is the key factor affecting its revenue and profitability in the short term.

In its Q2 2023 earnings release, BCPC disclosed that it "mechanically completed a new manufacturing unit for VitaCholine." There are both positives and negatives associated with this recent development.

On the positive side of things, VitaCholine's production capacity increases by approximately 100% after the recent expansion. At the company's Q2 2023 earnings call, Balchem highlighted that VitaCholine has the potential to accelerate its annual sales growth from the "double-digit" percentage now to "20%-25%" in the future following the production capacity expansion. In the past, VitaCholine's sales expansion was constrained by the lack of capacity.

On the negative side of things, the "new manufacturing unit for VitaCholine" is expected to hurt BCPC's profitability to some extent in the near term. It is reasonable to assume that it will take some time for the new production unit to ramp up, so the incremental sales contribution will be more than negated by higher depreciation costs for the short term.

Concluding Thoughts

Balchem Corporation is currently trading at 29.2 times consensus forward next twelve months' normalized P/E (source: S&P Capital IQ ), which is roughly at the same level as BCPC's 10-year average forward P/E multiple of 30.0 times. Considering Balchem Corporation's mixed outlook (i.e., revenue growth acceleration and profit margin contraction) and its reasonably fair valuations, I continue to rate Balchem's shares as a Hold.

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