Balchem Corp – Short-Term Thinkers Create A Buying Opportunity In This World Class “Compounder”
|June 24, 2015||Posted by Nat Stewart under Compounding Machines||
- Upside optionality of licensing and manufacturing deal for potential first-in-class Autism treatment is not factored in to present share price.
- Balchem’s “platform value” is significantly undervalued by the market.
- 8% price decline created by “hold” recommendation creates a perfect “buy the dip” opportunity for long-term thinkers.
- At 22X trailing adjusted economic earnings, the stock is a bargain given growth potential and Pharmaceutical optionality.
Market Reaction to “Hold” rating has created a great buying opportunity
This is going to a very brief article as I wanted to inform readers of what looks like a great buying opportunity before a potential price rebound sets in, which usually occurs after the “ratings game” effect wears off.
…provides state-of-the-art solutions and the finest quality products for a range of industries worldwide. Our Company consists of three business segments: ARC Specialty Products; Sensory Effects; and Animal Nutrition and Health.
Few investors realize that this little known company is one of the greatest shareholder wealth creation stocks of the past 15 years. Price appreciation alone since the year 2000 has generated an almost 4000% return, which is exceptional.
This performance has not been a fluke. Rather, it has been the result of a well thought out formula and excellent execution – Invest in businesses that generate a high return on invested capital, and then re-invest economic profits (in organic growth opportunities and additional high IRR businesses) in order to compound shareholder wealth.
Investors chronically undervalue “platform growth” companies. As I want this article to be timely, I am not going to expound on what this means. Rather, please read Bill Ackman’s excellent presentation on the concept, which can be found here. Balchem is a hidden, “under the radar” platform value company that few shareholders have heard of.
In May 2014 Balchem kicked its platform strategy into high gear with the acquisition of Sensory Effects. The results so far have been exceptional. Please study the following table:
(Note: I adjusted the data for 6/30/2014 using my estimate of what the figures would have been had the Sensory Effect acquisition took place at the beginning of the quarter, vs. in the middle of the quarter.)
For example. In the most recent quarter, Sales were up 68%, Net income was up 71%, and economic income (Adjusted for non-economic amortization and tax effects) was up 88%.
In the most recent conference call, new CEO Ted Harris stated:
…we clearly have significant investment that we want to make organically in the businesses, both capital investment as well as R&D investment. We have a lot of good projects both on the capital side as well as the R&D side, but we also have what I would call a very healthy pipeline of acquisitions that we are reviewing.
This is the “platform” strategy at work – harvest cash from high IRR, cash generative businesses in order to reinvest internally and in additional, high IRR businesses. It is the classic “compounder” story that can multiply investor wealth far beyond what near-term estimates would imply (just look at Balchem in year 2000 vs today to see the reality of this).
TTM price to economic earnings is now 22X. I consider this to be a very good price for a “platform” growth company, particularly given the massive upside optionality contained within this stock.
A massive, hidden “call option” on what might be a first-in-class treatment for Autism
Few investors know that Balchem has a licensing, development, and manufacturing deal with Curemark, a company that is developing what might potentially be the first available FDA-approved pharmaceutical treatment for Autism. Curemark states the following:
Curemark’s pipeline is led by CM-AT, which has the potential to be a first-in-class treatment for Autism. Curemark completed a Phase III trial of CM-AT and believes that the compound has the potential to address both core and non-core symptoms in children with Autism. Given the safety profile that has emerged in the clinical trials, CM-AT may be ideally suited for many children with Autism.
Dino Rossi had this to say in the latest conference call:
As previously discussed, our pharmaceutical delivery development efforts continue. We continue to work closely with the licensee of our technology, who has completed Phase III clinicals for their drug to be utilized in the treatment of autism. Their New Drug Application is being filed with the U.S. FDA, and we are collaborating as required.
Attempting to estimate the potential economic impact of a successful FDA approval is a challenge, due to the fact that the precise economic terms of the deal have never been disclosed. However, I have seen estimates that suggest Balchem’s pharmaceutical program might have the potential to more than double Balchem’s current net income. While the ultimate outcome is uncertain, it is fairly easy to say that Balchem’s pharmaceutical program adds massive upside optionality to the current share price.
Thank goodness for short-term thinkers – they create buying opportunities for longer-term thinkers
Or Buffett famously said, “Mr. Market is there to serve you, not to guide you”.
Just as the upside momentum of the stock was beginning to accelerate, Pivotal Research, a firm I have never heard of, came out with a “hold” rating on the stock. Their price target (I assume a fair value target) is $65 per share. As of the time of this writing, this has sent the stock down over 8% on the day, to 58.75 from a prior close of 63.81. Even by the logic of this “bearish” event, the stock is now 11% undervalued!
I find this type of market reaction amusing, to say the least. Yet, for long term investors who look farther ahead – to the long-term of compounding wealth vs. short term quarterly guessing, such declines are a great opportunity.
My investment conclusion:
Pivotal Research’s “hold” rating is a gift to long-term thinkers. My current strategy is to buy this dip and hold for at least 3-5 years. Tactical traders should consider buying up to $63 per share.