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elevator pitch
Balkem’s (NASDAQ:Nasdaq: BCPC) The stock is rated as a hold based on my analysis.
A previous BCPC article on August 2, 2021 focused on the company’s record-breaking second quarter 2021 financial results.The latest update for this Balchem It touches on the recent acquisitions and the inflationary cost environment that have caught the attention of investors.
I continue to assign a Hold investment rating to Balkem shares. His P/E valuation for the future of BCPC is reasonably fair and reflects upside potential from the company’s inorganic growth developments and downside risks associated with short-term profitability.
Recent M&A Drives Growth in Core Human Nutrition Business
On August 30, 2022, Balchem announced that it had acquired Bergstrom Nutrition. In the announcement, BCPC identified Bergstrom Nutrition as his MSM, a “nutritional ingredient” that boasts “benefits” in areas such as “joint health, sports nutrition, skin and beauty, healthy aging, and pet health.” described as a producer of .”
Bergstrom Nutrition is Balchem’s second M&A deal this year. BCPC said he completed the acquisition of Kappa Bioscience AS on June 21, 2022. Balchem called Kappa Bioscience a “leading manufacturer of science-based specialty vitamin K2” that supports “bone health, heart health, immunity and athletic performance.”
It is worth noting that both Bergstrom Nutrition and Kappa Bioscience will operate under Balchem’s core business segment, Human Nutrition & Health. The Human Nutrition & Health business is his BCPC’s largest segment in terms of both top line and revenue contribution. According to Balchem’s second quarter 2022 earnings press release, the company generated 55% of its revenue in the first half of this year and 57% of its pre-tax profit in the first half of 2022 from its Human Nutrition & Health business segment.
Human Nutrition & Health was also Balchem’s fastest growing business in the most recent quarter. BCPC’s Human Nutrition & Health operating segment revenues increased +18.1% year-over-year in Q2 2022, while Animal Nutrition & Health and Specialty Products operating segments compared +14.9% and +7.7% respectively achieved modest year-over-year sales growth. It makes sense, then, that Balchem has decided to focus his M&A on its core Human Nutrition & Health segment, further boosting the growth prospects of this business.
Specifically, Kappa Bioscience operates in an appropriately sized market with strong growth potential.
At the company’s latest Q2 2022 earnings call held on July 29, 2022, Balchem said the current global K2 market size is around $175 million, while Kappa Bioscience It emphasized that it has a 30% share of the K2 market. In contrast, the global market for human choline (another important product of BCPC’s Human Nutrition & Health business) is currently relatively small at $50 million.
BCPC said in its Q2 2022 earnings presentation slide that K2 is a rapidly growing market, expanding from $175 million today to $250 million to $300 million in 2025 It is also expected to. With Balchem’s support, there is scope to increase the penetration of Kappa Bioscience’s K2 product in the US (BCPC’s home market).
Aside from that, Bergstrom Nutrition appears to be a complete leader in the MSM industry.On their website, Bergstrom Nutrition emphasizes that the company is the “leading manufacturer of MSM” worldwide, stating that “MSM is used in animals and It is a pioneer in its use in human health.”
In short, it’s reasonable to conclude that Balchem has made two very good acquisitions. More importantly, it’s reassuring to know that BCPC is highly selective regarding his M&A targets and that pricing discipline is a key component of the acquisition process. During his Q1 2022 investor conference call in late April, Balchem stressed that he was “very disciplined” about “valuing the purchase price and risk,” adding, In two years, nothing (M&A deals) has been completed.” The fact that he continues to “participate and identify suitable targets.”
Expected higher costs due to inflation and takeover debt
In the previous section, we discussed how the recent acquisition of Balchem can support medium- to long-term top-line growth of the company’s Human Nutrition & Health segment. However, BCPC’s near-term profitability may be impacted by higher operating expenses and interest expense.
According to Wall Street consensus financial estimates obtained from S&P Capital IQ, Balchem’s normalized net profit margin is expected to decline to 14.2% in Q3 2022, from 15.1% in Q3 2021 and 14.6% in Q2 2022. The company’s normalized net profit is projected to improve to 14.5% in Q4 2022, which is still likely to continue. This is lower than his 14.6% normalized net profit margin achieved by Balchem in both Q1 2022 and his Q2 2022. In my opinion, Balchem’s actual profit margins in the second half of the year may be even lower than what sell-side analysts are currently projecting.
In terms of operating expenses, BCPC noted in its latest quarterly earnings call that the company’s “overall spending” was “on a similar trend in July, with slight month-over-month and quarter-over-quarter inflation continuing.” . “At the same time, Balchem also acknowledged in its second quarter investor briefing that it “clearly needs to recognize that we will reach a point where we may see a decline in demand.” In other words, BCPC’s operating costs are still gradually rising due to inflation. Cost pressures are offset to some extent by price increases, but there is a limit to how much Balchem can raise prices without hurting sales. This indicates he will have some margin pressure on BCPC later this year.
Observed that Balchem’s leverage ratio, or net debt to EBITDA, increased from 0.3x at the end of Q1 2022 to 1.8x as of June 30, 2022 in relation to its cost of funding or interest expense it is appropriate to This was mainly due to the acquisition debt associated with the buyout of Kappa Bioscience. Balchem did not disclose the terms of his M&A deal for Bergstrom Nutrition, so it is unclear whether this includes debt financing, which could further increase BCPC’s leverage ratio. This naturally leads to higher interest costs for Balchem. On the positive side, BCPC emphasized in its Q2 2022 earnings call that it will “ditch the 1.8x net debt leverage it currently holds with the cash we are generating fairly quickly.”
in conclusion
Balkem’s view and hold ratings are still neutral. While we see good things about BCPC’s recent transaction, we are concerned that costs may rise, resulting in lower profitability for the company in the very near future. Also, Balkem’s assessment seems fair and unappealing.according to S&P Capital IQ Valuation data shows that BCPC is currently trading at 29.8x the consensus forward for the next 12-month normalized PER.
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