Morningstar | Balchem Shares Trade Sharply Lower After 3Q Earnings Release, but We See No Cause for Alarm
Balchem shares traded off after investors came away unimpressed with the company's third-quarter performance. However, we don't view the results as concerning. Instead, they indicate slow but steady profit growth that we expect to persist in the coming years. Having updated our valuation model, our fair value estimate is unchanged at $89 per share. Our narrow moat rating also remains intact. Even though Balchem shares are now below our fair value estimate, the stock isn't yet trading at a sufficient margin of safety to offer attractive risk-adjusted return potential.Balchem reported record third-quarter adjusted EBITDA of $38.4 million, up 7.4% from the prior-year period. Profits were roughly flat across the company's animal nutrition and health, specialty products, and industrial products segment. However, the flagship human nutrition and health segment performed well, delivering record operating profits of $13.1 million. Profits rose 25.7% year on year, while sales increased 5.6% to $85.9 million. Even more impressive was that margins expanded despite headwinds related to product mix and higher raw material costs. The segment is now on pace to deliver its highest full-year operating margin since before the 2014 SensoryEffects acquisition. For the company as a whole in 2018, we now forecast $135 million of adjusted operating income and adjusted earnings of $2.99 per share on $644 million of revenue.
The company's exposure to the CM-AT drug that aims to treat autism symptoms remains a major swing factor in terms of its equity valuation. We account for the opportunity via an enterprise value adjustment that materially boosts our fair value estimate. We assume a 70% probability of approval but, if approved, we believe the stock would be worth just over $100 per share. Unfortunately, the approval timeline is entirely out of management's control and we expect no incremental information until early 2019.
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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