Balchem Stock: On The M&A Road Again (NASDAQ:BCPC)

Like so many industrial names, shares of Balchem (NASDAQ:BCPC) have seen a retreat as of late. The passage of time, share price move lower and a recent deal provide sufficient reasons to update the investment thesis.

My last take on the business dates back all the way to 2017, when I was upbeat on the company and concluded to buy this premium growth play on dips with a few upcoming triggers on the horizon.

Back To 2017

Five years ago, I concluded that Balchem has been a very impressive growth play for years and still had a rosy outlook. Founded 50 years ago, Balchem was a business which generated roughly $550 million in sales with 1,000 workers, being nicely balanced across four divisions in which the company seeks dominant positions in niche market segments.

The largest business was the Human Nutrition & Health business, with sales equal to roughly half of total sales, providing micro-encapsulation, choline and other minerals. With nearly $300 million in sales, segment margins around 13% were the lowest across all segments, yet there were some triggers as demand for choline might rise following recommendations from health agencies.

The second-largest business was the Animal Nutrition & Health business, responsible for 30% of sales by providing ingredients to dairy, poultry, companion and swine markets, as these operations were much more profitable than the human health business with segment earnings posted around 18%.

The specialty product business was responsible for an eighth of sales from providing minerals and ethylene and propylene oxides, as margins were very strong at more than 30%. The fourth business was a fracking business, responsible for just 4% of sales at the time, hurt by the implosion of US shale oil in the years before.

The company has tripled sales from $175 million in 2007 to just over half a billion in 2017, impressive results as the company has grown and transitioned the business at the same time. These achievements drove shares higher from $15 in 2007 to $75 in 2017 when I looked at the shares at the time, yet valuations were quite demanding at roughly 30 times adjusted earnings of $2.52 per share, albeit that leverage was still very reasonable at 1.6 times, leaving more room for dealmaking.

With the valuation being too demanding for me, I hoped to buy shares at $60 as the valuation was too demanding for me at $75, believing in a $3 earnings per share roadmap with some triggers within specific divisions on the horizon.

Steady Performance

After shares were stuck around the $70 mark in 2017, shares rallied above the $100 mark in 2018, fell to $70 later that year, and ever since have traded around the $100 mark. After shares were trading surprisingly resilient during the outbreak of the pandemic, shares rallied to a high of $175 late in 2021 and, by now, have fallen back to $125 per share.

In February 2021, the company posted its results for the year 2020 as revenues have steadily grown to $704 million. By now, the company is still comprised out of its three largest divisions as was the case in 2017, as the fracking business is no longer there. Amidst 25% revenue growth since 2017, earnings have risen in a modest fashion, with adjusted earnings posted at $3.32 per share.

Growth was convincing in 2021 as revenues rose 13%, reported at $799 million as adjusted earnings rose in a relatively modest fashion to $3.57 per share as the balance sheet has been further strengthened, seen in pristine condition with net debt reported at just around $25 million, a minimal amount with EBITDA approaching the $200 million mark.

Needless to say that valuations were quite demanding, as peak valuations at $175 per share worked down to a roughly 50 times earnings multiple, a huge valuation, even for a well-positioned business, with a strong balance sheet and good growth prospects. The first quarter of 2022 has been very strong, as results revealed in April. First quarter sales rose 23% to $229 million with adjusted earnings per share lagging a bit, up 17% to $1.03 per share, as this reveals a $4 per share number might be in sight. Net debt inched up to $85 million, far from an issue with EBITDA comfortably trending above $200 million per annum.

With shares trading at $120, valuations are still demanding at 30 times earnings, as the company has still demonstrated on a resilient performance and continued to operate with a strong balance sheet. With a near $4 billion equity valuation at $120, the company announced a substantial deal just towards the middle of the year.

Adding Vitamins

By Mid-June, Balchem has reached a deal to acquire Kappa Bioscience AS, a Norwegian manufacturer of specialty vitamin K2 for human nutrition and health business. The deal comes at a $338 million price, equal to roughly 8% of the current enterprise valuation, and for that money, Balchem will add $53 million sales (as expected in 2022). These revenues are profitable, grow rapidly as the purchase price is equal to 6.4 times expected sales this year.

The deal is set to be accretive to earnings, although that accretion has not been quantified, with earn-outs having the potential to add tens of millions to the purchase price in the coming years.

Net debt will increase to just over $420 million here, as this results in a leverage ratio of just around 2 times, still very manageable, with the deal adding some EBITDA and growth, allowing for continued deleveraging down the road.

Concluding Thoughts

While Balchem is firmly on track to earn around $4 per share this year, that is ahead of the Kappa deal, as I think that pro forma earnings might increase a few pennies, so hence Balchem still trades near 30 times earnings, all while leverage inched up, but is still very manageable.

While this is still a very high valuation, I recognize the long-term performance of Balchem, and I am willing to pay a premium for that, just not thirty times earnings here. Any further retreats to the hundred mark would be used as a buying opportunity by myself.