EUR 850.00 For Business Accounts Only

Morningstar | Balchem's Core Business Continues to Deliver Steady Results; FVE Unchanged at $89

Balchem's encouraging fourth-quarter results closed out a year of record sales, earnings, and free cash flow. Revenue grew an impressive 8.2%, although adjusted operating margins were flat at 20.9%. Having updated our valuation model, our $89 per share fair value estimate and narrow moat rating are unchanged.

Going forward, we forecast 3% organic revenue growth, with the primary growth driver being increased consumption of human-grade choline. Accordingly, the human nutrition and health segment is the only business unit for which we forecast margin expansion over our five-year explicit forecast period. We forecast that HNH operating margins will expand to 17% midcycle versus 14.2% in 2018. This would continue the trend of slow but steady margin expansion for the HNH business as revenue has concurrently grown in the high single digits. We expect operating margins for the company's other three segments (animal nutrition and health; specialty products; and industrial products) to fall roughly in line with historical levels, as we don't see any catalysts for material margin expansion on the horizon.

Ultimately, cash flows from Balchem's core businesses only account for roughly two thirds of our $89 fair value. The balance is accounted for by our probability-weighted cash flow forecasts for the company's exposure to the CM-AT experimental autism treatment. CM-AT, developed by pharmaceutical startup Curemark, is still awaiting U.S. Food and Drug Administration approval, a process that has taken far longer than expected. Regardless, if CM-AT were to be approved, we expect royalties earned by Balchem on CM-AT sales would materially increase companywide profits. Per management's commentary, we should receive more information this year after the NDA filing takes place.