Balchem: Boring But Beautiful

| About: Balchem Corporation (BCPC)

It is always a good time to find a new 'boring but beautiful' stock, a term I use to describe equities that remain relatively unknown by the majority of investors and not extensively covered by the media because they operate outside of popular, trendy industries. These types of stocks can often be a source of market outperformance on a consistent basis and for extended periods of time, all while trading under most investors' radars and detached from much of the media's scrutiny.

Chemical developer/manufacturer Balchem Corporation (NASDAQ:BCPC) is one such stock, and while it is not new to me, since my cousin and fellow contributor J. A. Saglimbeni wrote about it over a year ago in his article Balchem: Small Company, Big Profits, I am certain the company and its stock still remain unknown to the majority of Seeking Alpha readers. The reality is they shouldn't, as the company's dependable growth and the stock's steady appreciation warrants far more attention from long-term oriented investors going forward.

Balchem is a rare example of a company that can excel on multiple fronts: it offers impressive revenue and earnings per share growth as well as robust dividend-growth. Its long history of achieving both is hard to match, and as such, makes Balchem a great consideration for investors seeking market-beating returns and steadily increasing dividends.

About The Company:

Balchem is a specialty chemical developer, manufacturer and distributor. Founded in 1967, the New Hampton, New York-based company employs over 300 people and services consumers primarily in The United States and Europe. Balchem operates in three main business segments:

  • ARC Specialty Products - Includes the packaging and distributing of hazardous materials and the selling of Ethylene and Propylene Oxide blends. Through a network consisting of repackaging facilities in South Carolina and Missouri and distribution points in New York, California and Puerto Rico, Balchem packages and ships hazardous materials in custom-built, environmentally safe containers via its own truck fleet. The 'ARC' division also distributes Ethylene Oxide and Propylene Oxide, the former is used to sterilize medical equipment and the latter is used mainly as a fumigant for insect control and food contamination. Balchem is currently the leading supplier of packaged 100% Ethylene Oxide to the healthcare industry.
  • Food, Pharma and Nutrition - Includes the selling of microencapsulated ingredient solutions to meat processors, drug manufacturers and flavor specialists. Balchem is a leading supplier of choline, an essential nutrient that promotes healthy brain activity for people of all ages, regenerative properties for athletes and prenatal nutrition. The company's 'Food, Pharma and Nutrition' segment is responsible for 11 encapsulate brands including VitaCholine, VitaShure, PharmaSmooth, PharmaShure and BakeShure.
  • Animal Nutrition and Health - Includes the distribution of specialty nutrients for many different animal species including cattle, poultry and swine. The company provides 'encapsulated nutrients, chelated minerals and choline' that help support the health and productivity of feed animals through brands like NitroShure, NiaShure and ReaShure. The division also distributes products like KeyShure and VitaShure that work to promote the health of companion animals like cats and dogs.

Balchem also manufactures and distributes choline chloride and other derivatives, used for industrial application, to the oil and natural gas industry as well as the printed circuit board industry, which uses the blend as a cost effective stripping agent. Additionally, Balchem's European operations focus on the production of Methylamines, used in water treatment solutions and agricultural herbicides.

BCPC has done well for investors over the last decade, providing an annual average stock return of 23% and a total shareholder return of over 1,100%, which bests the S&P 500's total 10-year return of 116% by more than 1,000%. To best illustrate what has been driving this vast outperformance, I will analyze the company from both a growth perspective and a dividend-growth perspective. As a growth stock, I will analyze BCPC based on four main criteria: chart, revenue/earnings per share growth, business fundamentals and valuation. As a dividend-growth stock, I will analyze BCPC on both the number of dividend increases over time and the rate at which the company has been growing those dividends.


For any long-term growth investor, the chart is an extremely important indicator. Quite simply, a consistently upward trending chart indicates a viable growth story; anything else is cause for concern on the growth front. Let's first take a look at BCPC's 5-year chart (included are 50-day, 100-day and 200-day moving averages):

(Chart courtesy of Yahoo! Finance)

5-Year Total Return (all with dividends reinvested, numbers from

BCPC: 189.4%

S&P 500: 26.54%

The five-year chart of BCPC is interesting. While the overall trend is up and the performance is impressive, BCPC's total return of 189.4% easily bests the S&P 500's total return of 26.54%, there is a major technical breakdown in early 2012 that is concerning. Disregarding for now the major 2012-drop (which will be discussed in detail further on in the article), BCPC has traded well over the last five years, largely obeying its major moving averages.

Let's take a look at BCPC's one-year chart to see more recent developments and patterns in the stock's trading. The following is a one-year chart of BCPC (included are 50-day, 100-day, 200-day moving averages as well as MACD and slow stochastic indicators):

(Chart courtesy of Yahoo! Finance)

1-Year Total Return (all with dividends reinvested, numbers from

BCPC: 47.02%

S&P 500: 14.91%

BCPC's one-year chart looks strong. Although quite volatile, as small cap growth stocks tend to be, the stock has returned almost 50% in the last year alone. After recovering from the large drop in early 2012 and regaining its major moving averages, BCPC has acted relatively well, significantly faltering only in November amid greater market turmoil. Additionally, the MACD indicates heavy buying pressure and weak selling pressure.

From a chart perspective, Balchem looks relatively strong, especially as of late. The stock is purchasable from a technical standpoint and is showing the kind of long-term upward trend that growth investors need to see.


For comparative purposes, I have chosen to compare Balchem's growth numbers with those of two similarly-sized companies that also operate in the specialty chemical industry: FutureFuel Corp (NYSE:FF) and Innophos Holdings Inc. (NASDAQ:IPHS). Let's first take a look how all three companies are expected to grow over the next two years:





Revenue Growth (2013)*




Revenue Growth (2014)*




Revenue Growth (2-Yr. Avg.)*




EPS Growth (2013)*




EPS Growth (2014)*




EPS Growth (2-Yr. Avg.)*




(Numbers from Yahoo! Finance, MSN Money, as of 4/7/13)

* Indicates at least some numbers derived from projected analyst estimates in listed fiscal year.

While all listed companies are expected to grow revenue and earnings per share in 2013/2014, Balchem leads in both regards, with a projected two-year average revenue growth rate of 12.45% and a projected two-year average EPS growth rate of 21.6%.

To get a better understanding of how these projections compare to Balchem's recent history of revenue/EPS growth, let's take a look at the company's 7-year growth history:

Fiscal Year


Change (%)


Change (%)




































Avg. 5-Yr. Growth Rate





(Numbers from Yahoo! Finance, MSN Money, as of 4/7/13)

Balchem has been very consistent with regards to revenue and earnings per share growth over the last seven years, failing to grow sales only in the recessionary 2009 fiscal year and managing to grow EPS seven years in a row without falter. Although revenue growth has slowed noticeably from the more robust levels seen in 2006-2008, it has been holding steady above the 10% mark after 2009 for the most part, dipping below the key level only in fiscal 2012. In terms of earnings per share growth, Balchem has performed even more consistently over the last seven years, averaging above 10% growth in every year except 2012.

Also important is that Balchem's seven-year growth averages for both revenue and EPS are not too far off from the company's projected 2013/2014 estimates, indicating that the company is expected to grow at levels that are comparable to its more recent past. With regard to revenue, Balchem is expected to grow a bit slower on average in 2013/2014 than it has in the last seven years. However, with regard to earnings per share Balchem is expected to grow at slightly higher levels in 2013/2014 than it has over the last seven years.

Finally, what the above table shows best is just how difficult the fiscal 2012-year was for Balchem. It was one of the company's worst years of the last decade in terms of both revenue and EPS growth, and it still was not a terrible year by any stretch. The company managed to grow sales by 6.34% and EPS by 3.12% despite major setbacks, including Balchem's own suspension of its AminoShure-L, 52% Lysine product for feed animals due to doubts concerning its effectiveness as well as particularly soft fourth-quarter 2011 demand for some of the company's encapsulated ingredients in its 'Food, Pharma and Nutrition' segment.






Market Cap




Total Debt




Total Cash




2013 Projected Revenue*








ROIC (5-Yr. Avg.)








P/E (forward)




Net Profit Margin








(Numbers from Yahoo! Finance, MSN Money, as of 4/7/13)

Although all listed companies are relatively small, Balchem is the largest with a market capitalization of $1.26 billion. In addition to having zero debt, Balchem also has an impressive amount of cash, its $144 million is equal to 11.48% of the company's current market cap.

A look at the all-important return on invested capital metric reveals that Balchem is the most efficient out of all listed competitors at generating returns off of capital investments. The company's 5-year average return on capital of 17.1% proves that above average ROIC is the norm for Balchem. This indicates that the company's management team has remained committed to efficiently using the money invested in the company's operations.

BCPC also boasts the highest net profit margin out of all listed competitors. At 12.89%, Balchem's net margin is significantly better than those of both FutureFuel Corp. and Innophos Holdings.

However, when it comes to valuation Balchem appears expensive when compared to listed peers, as its current and forward P/E ratios are significantly higher than those of both FutureFuel and Innophos. When viewed historically, Balchem still appears expensive on a trailing-twelve month basis, but much cheaper on a future twelve-month basis, as the company's forward P/E of 21.9 is lower than its 5-year average P/E of 24.36. With projected revenue growth for 2013/2014, slightly lower than the company's seven-year average, and projected earnings per share growth slightly higher, Balchem seems fairly priced on a forward looking basis.

Balchem's dividend yield of 0.5% leaves a lot to be desired and lags significantly behind the yields of both FF and IPHS, at 3.7% and 2.6% respectively. However, the more interesting story is in the growth of Balchem's dividend over the years.

Dividend Growth:



Price Per Share






Payout Ratio


Dividend Increases In Last 10 Years


% Increase In Last 10 Years


Annual Dividend Growth (10-Yr.)


Annual Dividend Yield (10-Yr.)


Dividend Increases In Last 5 Years


% Increase In 5 Years


Annual Dividend Growth (5-Yr.)


Annual Dividend Yield (5-Yr.)


Dividend Increases In Last 3 Years


% Increase In 3 Years


Annual Dividend Growth (3-Yr.)


Annual Dividend Yield (3-Yr.)


Most Recent Dividend Raise


Most Recent Dividend Increase (%)


(Numbers from Yahoo! Finance,, as of 4/7/13)

Balchem has done extremely well increasing its dividend over the last decade. While not as consistent with increases as some other dividend-growth stocks, as it fails to manage an increase every year for the last decade, Balchem has increased its dividend by well over 1,000% in the last ten years, which is the highest percentage increase that I have seen in my analysis of dividend-growth stocks.

Note: the only stock that I have analyzed to even come close to matching BCPC's robust dividend-growth over the last decade is Church & Dwight Co. Inc. (NYSE:CHD), which managed to increase its dividend approximately 860% over the last ten years (Click on my article Church & Dwight: A Solid Growth/Dividend Investment In 2013 for more information on CHD as a dividend-growth stock).

More importantly is that Balchem is becoming more consistent with regard to dividend increases, managing to raise the dividend each year for the last three years. The low payout ratio, currently 17%, suggests that Balchem should be able to continue to provide investors with steady increases for years to come.

Additionally, Balchem's yield has basically stayed the same for the last ten years, just above 0.5%, indicating the company's dividend-growth has basically matched the stock's stellar performance over the last decade, a truly impressive feat considering BCPC has appreciated almost 1,200% since 2003. (Note: BCPC's 10-year total dividend-growth of 1,285% actually beats the stock's total shareholder return of 1,180%)

Growth Catalysts:

Balchem recently reported fourth quarter 2012 earnings in late February, and the results were very impressive. The company reported record fourth quarter net earnings of $9.9 million, or diluted net earnings per share of $0.33, an increase of 6.5% compared to fiscal 2011's fourth quarter earnings of $9.5 million, or $0.31 per share.

One of the main drivers of Balchem's growth in this most recently reported quarter was the company's 'Animal Nutrition and Health' segment, which grew sales 18.1% year over year. In the conference call, President and CEO Dino Rossi explained that the growth was driven primarily by strong demand for

choline, choline derivatives and other products used for industrial applications,

which were up approximately $7 million in the forth quarter year over year. CEO Rossi also described how

other encapsulated products sold substantially," in the quarter, "offsetting the impact of having discontinued the Aminoshure product.

The 'Food, Pharma and Nutrition' portion of Balchem's business grew 11% in the fourth quarter, generating $10.7 million in revenue on increased demand for the company's NitroShure product line. Additionally, the company saw demand strengthen in the European market for its encapsulated food items, up approximately 40%. However, earnings for the segment were down 10.7% from the prior year quarter, coming in at $2.3 million. This decrease was largely due to an increase in raw material costs. According to CFO Frank Fitzpatrick:

results for this segment continue to reflect a roller coaster effect of pipeline sales, inventory level management and delayed marketing initiatives.

Balchem's 'ARC Specialty Products' segment was the laggard in terms of growth in the fourth quarter but the business still managed to generate record quarterly revenue of $13 million, up 5.1% year over year on increased sales volume of its Ethylene Oxide and Propylene Oxide products. Earnings for ARC were up 9.3% to $5.5 million in the quarter due mainly to an increase in average selling prices and a favorable product mix.

Looking ahead into 2013 and beyond, management is looking to continue to improve Balchem's businesses in three main ways: operational and logistical improvements, new product development and expansion through acquisitions, joint ventures and geographic extension.

With regard to operational and logistical improvements, Balchem recently finished and opened a new production plant in Covington, Virginia. The plant, which has already begun to ship goods, is expected to double production capacity of the company's ruminant products in the 'Animal Health and Nutrition' segment. The ruminant product line is a fast growing portion of the AHN segment, increasing by more than 33% in the fourth quarter year over year.

New product development at Balchem includes advancements in the choline department, specifically as it relates to nutrition. In addition to constantly promoting the advancement of choline as a general nutrient that aids healthy living for people of all ages, the company is also concentrating on the nutrient's recuperative value for athletes. Balchem previously reported that it had been working with a

large sports nutrition company on the introduction of sustained release amino acid products.

Just this last quarter, Balchem made its first sale on the launch of this new product.

The company is also making progress on the pharmaceutical side of product development, particularly with regard to the licensing of Balchem technology in the treatment of autism. A Phase III clinical trial was concluded, and the company is currently in the process of supporting a New Drug Application so progress can move forward. Additionally, management mentioned briefly several new products that would utilize Balchem's encapsulation technology but refused to expand, even when pressed by analysts in the Q&A, as the research is still very early in the development phase.

On a similar product note, CEO Rossi explained that the company is still in the process of fixing the problems with its AminoShure-L, 52% Lysine product, which it had suspended in May 2012. Management expects to re-introduce the product once progress has been verified but management's early indications seem to point toward a fourth quarter release at the earliest.

Industrial grade products have been growing very well for Balchem recently, up 62.8% in the fourth quarter year over year, and management expects

that these products will continue to show strength in 2013, driving steady to increasing levels of sales and profitability.

Management also noted steady improvements in the oil/gas fracking industry on increased volumes in North America.

With regard to Balchem's global prospects, management seems confident in the progress that has already been made, especially with regard to the most recent outperformance in the European food market of Balchem's encapsulate business, mainly due to a reorganizing of business structure and cooperation with new food distributors. By all indications, Balchem's global potential seems to still be largely untapped with regard to food markets. Management reiterated to analysts that the European space certainly remains a "growth opportunity" going forward.

CEO Rossi expounded in the latest conference call:

We remain committed to organic growth as we look to continually expand our product offerings and move into new geographies. We will continue to strengthen our global growth platform and are confident that more business can be generated based on the unique portfolio of products that we offer the markets we serve.


One of the major risks with a chemical developer and manufacturer is a sudden mishap with regard to one of the company's main product lines. Balchem's suspension of its AminoShure-L, 52% lysine product should serves as a prime example of the kind of difficulties such problems can create. In addition to impacting revenue and earnings, product disruption in the manufacturing of chemical goods is usually not an easy fix, as the AminoShure-L, 52% lysine product will have been sidelined for well over a year before it is able to be re-introduced.

Another risk for investors is what management referred to in the Q4 2012 conference call as the "roller coaster effect" with regard to earnings in certain segments. Any sudden weakening of demand for key products, or a rise in raw material costs, can negatively impact Balchem's growth trajectories with little warning. A perfect example of this is what happened to the company in the fourth quarter of 2011, a precipitous drop in demand for the company's encapsulated product lines in the food market industry coupled with rising input costs caused a large revenue/EPS miss in early 2012.


Over the years, Balchem has amply rewarded long-term investors with a combination of market beating stock appreciation and robust dividend-growth. Although the stock's chart is still suffering some of the effects of a troublesome 2012, the worst seems to be behind Balchem and the company's future looks promising.

Management has proven itself capable of growing revenue and earnings per share consistently and in the face of challenging economic headwinds. The company's methodical approach to new product development and geographic expansion is done with the idea of creating sustainable future growth while at the same time preserving shareholder value by maintaining healthy a balance sheet and sound business fundamentals. Management has also shown that it is dedicated to paying investors larger dividends every year and the low payout ratio suggests that this will be able to continue long into the future.

I recommend investors wait for the company to report its first quarter earnings in May and give guidance for the rest of the year. If projections remain the same or are raised, then I believe investors will do well purchasing shares of Balchem for the long-term. It may be a boring business, but I believe Balchem will continue to appreciate beautifully.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BCPC over the next 72 hours. I have been long BCPC in the past and plan to purchase the stock again. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.