Balchem: Good Quarterly Performance Priced In
Summary
- Balchem's 2Q 2021 revenue and earnings set new historical highs and beat market expectations, which led to its share price trading at an all-time peak post-results.
- But Balchem's earnings growth was not as good as its top-line expansion, due to raw material cost inflation and higher expenses relating to a flash flood.
- The market values Balchem at consensus forward FY 2021 and FY 2022 normalized P/E multiples of 37.3 times and 33.4 times, respectively.
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Elevator Pitch
I continue to rate Balchem Corporation's (NASDAQ:BCPC) shares as Neutral.
Balchem's stock price increased by +8% from $124.21 as of April 23, 2021, to $134.89 as of July 30, 2021, after my previous update on the company was published on April 26, 2021. The market currently values Balchem at consensus forward FY 2021 and FY 2022 normalized P/E multiples of 37.3 times and 33.4 times, respectively, which are much higher than its historical trading averages.
2Q 2021 revenue and earnings set new historical highs and beat market expectations, which led to its share price trading at an all-time peak post-results. But Balchem's earnings growth was not as good as its top-line expansion, due to raw material cost inflation and higher expenses relating to a flash flood.
I view a Neutral rating as fair for Balchem, with its current valuations being rather rich and already pricing in the positives associated with its good 2Q 2021 financial results.
Second-Quarter Financial Numbers Set New Historical Highs
Balchem reported financial performance for the second quarter of 2021 on July 30, 2021, before trading hours. Its shares closed at a new historical peak of $134.89 on the day of the earnings release itself. The stock's good share price performance leading up to its 2Q 2021 financial results announcement was to be expected, considering that the company achieved solid growth in both revenue and earnings which were ahead of market expectations.
Total revenue for Balchem rose by +17% YoY from $173 million in 2Q 2020 to $202 million in 2Q 2021. It is worthy of note that this was the company's highest quarterly sales that it has ever registered in its corporate history. Wall Street analysts had earlier anticipated that Balchem's quarterly top line will be approximately $185 million, or -8% lower than the company's actual 2Q 2021 sales.
Balchem's non-GAAP adjusted earnings per share increased by +10% YoY from $0.85 in the second quarter of 2020 to $0.93 in the most recent quarter. BCPC's actual 2Q 2021 adjusted earnings per share came in +6% higher than the market consensus earnings per share forecast of $0.88. Furthermore, Balchem also set a new record for second-quarter earnings in 2Q 2021.
In my earlier April 26, 2021, article on Balchem, I noted that there was "strong demand for certain products sold under Balchem's Human Nutrition & Health business segment" driven by "an increase in health awareness among consumers as a result of COVID-19." Balchem's core Human Nutrition & Health business saw its segment revenue and operating income grow by +14% and +23% YoY to $112 million (more than half of company's total revenue) and $19 million, respectively. Notably, Balchem highlighted at the recent 2Q 2021 earnings call that there was "no real decline in the aspects of the business that benefited somewhat from the pandemic." This implies that some of the tailwinds that Balchem experienced in recent quarters could possibly turn out to be structural in nature, i.e. more people consume nutrition products on a more regular basis in response to the pandemic.
However, it is important to note that Balchem's non-GAAP adjusted earnings per share growth of +10% YoY was lower than that of the +17% YoY expansion in its top line in the last quarter. Balchem explained in the company's 2Q 2021 earnings press release that its relatively slower bottom line growth (relative to top line) was the result of "higher raw material" expenses and "costs associated with the recovery from the flash flood event that we experienced at our Verona, Missouri manufacturing site." I will delve into these factors in greater detail in the subsequent section of this article.
Spotlight On Raw Material Costs And Flash Flood
As mentioned above, the rise in raw material costs have hurt Balchem's profitability to some extent, with the increase in earnings lagging behind its revenue growth.
I stressed in my earlier April 2021 article on the company that "Balchem's market leadership translates into strong customer bargaining power, which allows the company to maintain its profitability over time despite changes in the market environment." This still largely holds true, but with some caveats.
A key thing to note is that the pricing power of Balchem varies from business to business. The company disclosed at its 2Q 2021 results briefing that "our human business are the ones that have been best enabled to-date to also pass-through the raw material increases to their customers." This suggests that Balchem's other business segments like Animal Nutrition & Health and Specialty Products might have comparatively lower pricing power than its core Animal Nutrition & Health business. Also, it could take a few months or a couple of quarters for the majority of the raw material cost increases to be passed on its customers, and this explains why Balchem's profitability and earnings growth have been affected.
Separately, Balchem had revealed that its "Verona, Missouri plant experienced a flash flood event as a result of very localized storms", and "the plant was shut down for several weeks." In terms of financial effects, the flash flood had a negative impact amounting to -$3.8 million in 2Q 2021, and Balchem is guiding for an additional $1.5 million of expenses relating to this in 3Q 2021. On the positive side of things, BCPC could potentially claim up to $2 million in insurance to offset this. More importantly, the flash flood is a one-off event with no impact on the company's medium- to long-term growth prospects.
Decent Outlook For Full-Year FY 2021
The sell-side analysts covering Balchem's shares see the company's top line and normalized earnings per share rising by +9.3% and +9.0% to $769 million and $3.62, respectively, in the current year according to S&P Capital IQ data. As a comparison, BCPC's revenue and adjusted earnings per share were up +11.6% and +8.4%, respectively, in the first half of fiscal 2021.
In other words, market consensus expects Balchem's growth momentum in 1H 2021 to be sustained for the second half of the year to a large extent. This appears to be reasonable, taking into account the fact that the negative impact of the flash flood will be milder in 3Q 2021, and that the company should gradually pass on more of the increase in raw material expenses to its customers over time.
On the flip side, Balchem's good 2Q 2021 results and positive FY 2021 outlook have been factored into the stock's valuations and there are still downside risks, as detailed in the final section of the article.
Valuation And Risk Factors
Based on the stock's last traded price of $134.89 as of July 30, 2021, the market values Balchem at consensus forward FY 2021 and FY 2022 normalized P/E multiples of 37.3 times and 33.4 times, respectively. In comparison, both its three-year and five-year mean consensus forward next twelve months' P/E ratios were lower at 31.6 times and 31.4 times, respectively.
Balchem's key risks include a longer time taken for it to pass on the increase in raw material expenses to its clients, a greater-than-expected negative impact relating to the flash flood at its manufacturing facility in Missouri, and a normalization of demand for some of its products that have witnessed higher demand due to increased health consciousness due to COVID-19.
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This article was written by
The Value Pendulum is an Asian equity market specialist with over a decade of experience on both the buy and sell sides.
He is the author of the investing group Asia Value & Moat Stocks, providing ideas for value investors seeking investment opportunities listed in Asia, with a particular focus on the Hong Kong market. He hunts for deep value balance sheet bargains and wide moat stocks and provides a range of watch lists with monthly updates within his investing group.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.
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