Morningstar | Balchem Reports Mixed 2Q Results; No Update on CM-AT; Slightly Raising Our FVE to $89
Although Balchem shares traded lower after the company's second-quarter earnings release, we didn't see any cause for concern. While profits in the human nutrition and health segment were a bit soft, we were encouraged by strong performance from the company's three other reporting segments. Driven by a slight increase to our near-term profit outlook as well as the time value of money, our fair value estimate rises to $89 per share from $85. Our narrow moat rating is unchanged.Adjusted EBITDA rose 13% year on year to $41 million, representing just above a 25% margin on record sales of $164 million. Going forward, we forecast that adjusted EBITDA will grow at a 5.2% CAGR. However, this will be supported primarily by revenue growth, as we expect margins to expand only slightly to 25.5% by the end of our explicit forecast period. We continue to view the human nutrition and health segment as the key driver of incremental profits, as awareness surrounding the health benefits of choline gradually advances.
During the earnings call, management had no updates to provide on the phase 3 trials for CM-AT, an autism treatment for which Balchem provides the delivery system. Consistent with prior messaging, management indicated that a new drug application will be filed before year-end 2018 and that the U.S. Food and Drug Administration might take roughly six months to make a determination before commercial viability can be explored. CM-AT is a massive opportunity that remains a major source of uncertainty for the company's future cash flows.
However, with the stock having traded higher year-to-date, we no longer believe CM-AT represents option value to the upside. Instead, current share prices are only slightly below what our fair value would look like if CM-AT is approved. We currently assign a 70% probability of approval. If CM-AT is rejected, our fair value estimate for Balchem would fall precipitously to $56 per share.
Balchem is engaged in the development, manufacture and marketing of specialty performance ingredients and products for the food, nutritional, feed, pharmaceutical, medical sterilization and industrial markets. The company has four reportable segments: Human Nutrition & Health, which provides human grade choline nutrients and mineral amino acid chelated products for nutrition wellness applications; Animal Nutrition & Health, which provides nutritional products in addition to basic choline chloride; Specialty Products, which provides ethylene oxide and propylene oxide; and Industrial Products, which provides certain derivatives of choline chloride, as well as manufactures and sells methylamines.
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