Wednesday, April 2, 2014

Small Cap Ingredient Stock Balchem Corporation (BCPC): A Good Ingredient For Your Portfolio? MGPI & PBJ

Small cap ingredients stock Balchem Corporation (NASDAQ: BCPC) jumped 22.76% yesterday on news about an acquisition, meaning its worth taking a closer look at the stock along with potential peers like small cap MGP Ingredients Inc (NASDAQ: MGPI) and the PowerShares Dynamic Food & Beverage ETF (NYSEARCA: PBJ).

What is Balchem Corporation?

Small cap Balchem Corporation is focused on the development, manufacture and marketing of specialty performance ingredients and products for the food, nutritional, feed, pharmaceutical and medical sterilization industries in the United States and internationally. The company consists of three business segments: 1) ARC Specialty Products; 2) Food, Pharma and Nutrition; and 3) Animal Nutrition and Health. Balchem Corporation sells its products directly, as well as through independent distributors and sales agents.

As for potential benchmarks, small cap MGP Ingredients provides a range of naturally derived specialty ingredients that have been developed for use primarily in food, beverage and household product applications while the PowerShares Dynamic Food & Beverage ETF invests in the Dynamic Food & Beverage Intellidex Index which is comprised of common stocks of 30 US food and beverage companies that are principally engaged in the manufacture, sale or distribution of food and beverage products, agricultural products and products related to the development of new food technologies.

What You Need to Know or Be Warned About Balchem Corporation

Small cap Balchem Corporation is focused on the development, manufacture and marketing of specialty performance ingredients and products for the food, nutritional, feed, pharmaceutical and medical sterilization industries in the United States and internationally. The company consists of three business segments: 1) ARC Specialty Products; 2) Food, Pharma and Nutrition; and 3) Animal Nutrition and Health. Balchem Corporation sells its products directly, as well as through independent distributors and sales agents.

As for potential benchmarks, small cap MGP Ingredients provides a range of naturally derived specialty ingredients that have been developed for use primarily in food, beverage and household product applications while the PowerShares Dynamic Food & Beverage ETF invests in the Dynamic Food & Beverage Intellidex Index which is comprised of common stocks of 30 US food and beverage companies that are principally engaged in the manufacture, sale or distribution of food and beverage products, agricultural products and products related to the development of new food technologies.

What You Need to Know or Be Warned About Balchem Corporation

On Monday after the market closed, Balchem Corporation announced it had entered into a definitive agreement to acquire St. Louis, Missouri based Performance Chemicals & Ingredients Company (d/b/a SensoryEffects), a privately held supplier of customized food and beverage ingredient systems, for a purchase price of $567 million in cash. SensoryEffects expects to have revenues of approximately $260 million and EBITDA of approximately $53 million for this year. The acquisition purchase price reflects a multiple of 10.7 times estimated 2014 EBITDA and the transaction is expected to be immediately accretive to Balchem Corporation's EPS.

In late February, Balchem Corporation reported record fourth quarter sales of $81.6 million for a 2% year-over-year increase along with record quarterly net earnings of $10.7 million for an 8.6% year-over-year increase. For the full year, Balchem Corporation reported revenues of $337.173 million verses $310,393 million along with net income of $44.874 million verses $40.005 million. According to the Chairman/CEO:

"Certain sectors of the segments continued to grow at double-digit rates, and even though more modest growth rates were realized in the industrial markets this quarter, margin percentage improvement occurred due to certain manufacturing efficiencies and the portfolio product mix. We do expect each of the markets served to continue to grow organically in 2014 and to execute on our strategy to strengthen the business portfolio and geographies served through acquisition(s)."

Otherwise, it should be noted that according to Yahoo! Finance data, Balchem Corporation has a trailing P/E of 44.12 and a forward P/E of 31.52 along with a forward dividend of $0.26 for a 0.5% dividend yield and an 18% payout ratio. In addition, Yahoo! Finance insider transaction data shows that insiders have been busy exercising options and then selling the shares they received but in the last earnings call (the transcript is available here on Seeking Alpha), an analyst did ask the CEO about that insider selling with the CEO commenting:

Coincidentally, in December, there was also some vesting of options and some of the sell activity, while some was not very large, the number of people went up. But it was really to deal with the tax issues associated with that activity. Sort of that, I think you would find those people again, are not they're actively selling. But it was to deal with that issue that quite honestly happened – it's happened in the last few Decembers. So, that part was not really new.

So some of these are just aging options that quite honestly require some activity, and that's what was going on there. I don't think anything particularly unusual. And again, sort of that I think it was 10b5-1 program that were out there. I'm going to say predefine the sales over as much as six-month windows were put in place and exercised.

Again, I don't think it was kind of one-off. I see the comments that are out there, and the idea that management is panicking. I don't think is at all what the message should be. Again, the majority of the shares for sure were well advanced and documented for everybody to know about. So, I don't know what else I could tell you other than that's really what transpired.

Share Performance: Balchem Corporation vs. MGPI & PBJ

On Tuesday, small cap Balchem Corporation surged 22.76% to $63.98 (BCPC has a 52 week trading range of $41.00 to $65.89 a share) for a market cap of $1.94 billion plus the stock is up 8.3% since the start of the year, up 45.6% over the past year and up 308.3% over the past five years. Here is a look at the performance of Balchem Corporation verses that of MGP Ingredients and PowerShares Dynamic Food & Beverage ETF:

As you can see from the above chart, MGP Ingredients has been the best performer albeit that was the year or two right after the financial crisis while both Balchem Corporation and PowerShares Dynamic Food & Beverage ETF have been more steady performers.

Finally, here is a look at the latest technical charts for all three investments in the ingredient or food sectors:

The Bottom Line. If you don't mind all the insider selling and the CEO explanation for it, small cap Balchem Corporation is at least worth taking a closer look at by investors. 

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