Balchem Corp.: A clever concoction
Investors who stumble across Balchem Corp. (Nasdaq: BCPC) might think it’s a specialty chemical maker. But Balchem, based in the Catskills region of New York state, is much, much more — and much, much less.
Depending on the whim of the service or analyst doing the grouping, one could find Balchem competing in the meat products sector, chemical manufacturing, industrial manufacturing, or specialty chemicals.
Confusing, isn’t it? They’d all be correct, to a certain degree, but also wrong, which could be why Balchem has only really started attracting some substantial interest from institutional investors during this decade, as sales have climbed steadily past $50 million, and topped $100 million during 2006.
Balchem is a 40-year-old New Hampton, N.Y.-based company with three business segments: specialty products, encapsulated/nutritional products and unencapsulated products operating as ARC Specialty Products, Balchem Encapsulates and BCP Ingredients, respectively. Through ARC, it’s the dominant supplier of ethylene oxide, a gas mostly used to make other substances, but also as a fumigant in making spices and cosmetics, and to sterilize medical devices including pacemakers.
The past few years, Balchem has made some strategic acquisitions that fit into its product mix. Balchem enhanced its global presence last year by buying the choline chloride and methylamines businesses from Akzo Nobel Chemicals S.p.A. in Italy. That boosted its production of choline, an amino acid that’s a building block of life. Choline chloride is used in poultry and swine production, but more choline is being consumed by humans as a nutritional supplement.
The proprietary microencapsulation technology developed by Balchem is used in many ways in the food, nutrition, pharmaceutical and specialty animal health markets. For example, in ruminant animals such as cows, vitamins and supplements that need protection from the four stages of the stomach to reach the digestive track can take advantage of microencapsulation to reduce the amount administered — and cutting costs. Aquaculture uses the Balchem encapsulates to get needed substances into fish without dilution by the water.
For investors, Balchem has many analysts’ research reports to lean on. Lawrence Goldstein, a general partner of Santa Monica Partners in suburban New York who manages about $200 million, has been buying the stock since 1989, shortly after Balchem went public. This stock, he says, is one to buy, then “stick it in a vault and leave it there for your heirs.”
Goldstein — who launched Santa Monica in 1982 and holds a trademark on the phrase “stocks overlooked or ignored by otherwise intelligent investors” — told SmallCapInvestor.com that “we probably bought shares damned near every year” from 1989 through the early part of this decade.
Others have also voiced favorable impressions. TheStreet.com has had a “buy” rating on Balchem since May 2005. Balchem rose to No. 51 on the Forbes list of 200 best small businesses, from 116 in 2006. The company also was listed on last year’s Fortune Small Business list of top 100 fastest-growing companies, coming in at No. 95.
Jonathan Lichter of Sidoti & Co., an analyst who regularly covers Balchem, has a “buy” rating on the stock, with a $27 price target — reflecting a hefty 35% potential upside from where it’s trading.
The Sidoti analyst is expecting Balchem to report earnings of $0.21 a share for the just-ended fourth quarter, up from $0.17 in the final three months of 2006. The full-year EPS could come in around $0.86, compared with $0.67 the year before, when results are issued, probably in mid-February.
“I like that they have two businesses that dominate their markets,” Lichter told SmallCapInvestor.com. “In ethylene oxide, they have a dominant position in the U.S., which is pretty secure without a noncyclical threat … and in choline, since it is primarily used in chickens, again the food business is less cyclical” when other companies are affected by declining economic conditions.
The company, with some 200 employees, has a veteran management team, anchored by Dino Rossi, the president and chief executive who added on the chairman’s title last year.
“Dino is very down-to-earth, a real guy, who gives you straight talk,” Goldstein said. “He’s put together a cadre of people who are wonderful managers.”
Shares approached analyst Lichter’s 12-month target price on Dec. 26, hitting an all-time high of $24.12. But like the rest of the market, Balchem’s (BCPC) shares have traded lower during January, closing at $20.26 on Friday. Still, that reflects a considerable amount of growth in a stock that never traded higher than $5 between 1987 and 2001, which since then has not dropped below that level. The 52-week low is $13.76.
