Balchem

On microencapsulation and other specialty chemicals

Good grief, sometimes I really do make life extra hard for myself! Instead of writing an article about a company everyone knows, my research digs up some company from a far corner of the stock market world that I really like, but about which I can only find information with difficulty, and not much of it at that. Still, I think that's exactly what gives DividendeOhneEnde its charm. And for that I'm happy to put a lot more time into my articles. So at this point, my apologies and the explanation for why there isn't an article every Sunday right now.

Today it's about Balchem Corporation, a specialty chemicals company that has specialized, among other things, in developing high-performance ingredients for the food industry. The company is fairly small and therefore pretty unknown, but its revenue and earnings growth look truly first-class. Just the right candidate for us.

The history and business model of Balchem Corp.

Before I turn to the history of Balchem Corporation, I'd like to briefly touch on the topic of microencapsulation. In this chemical process, a particle, whether solid, liquid, or gas, is enclosed in a coating so that it's protected from outside influences and can be released in a controlled way. In the food industry, for example, microencapsulation is used to extend the shelf life of aromas, minerals, vitamins, or other flavors and ingredients, or to protect them from oxidation. In the pharmaceutical industry, on the other hand, the encapsulation method is used, among other things, to release the active ingredient only at a desired point in time. Dr. Laszlo Balassa played an important role in the development and research of microencapsulation. He was born on September 6, 1904, in Hungary during the Austro-Hungarian Monarchy and earned his doctorate in biochemistry from the University of Vienna at just 22. After working for about four years as a metallurgist in Mexico, he took a job as a research chemist at DuPont, one of the world's largest chemical companies.

Laszlo, or Leslie as he called himself in America, had bigger plans and from 1944 on founded various companies that could manufacture his inventions. Among other things, he developed a treatment for pain relief after molar extractions by mixing cattle cartilage with a saline solution into a paste and using the patented preparation, under the brand name Catrix, for wound healing. Apart from that, Leslie also patented a microencapsulation process that became the basis for time-release medications. This is where Dr. Herbert Weiss enters the story. He too was a chemist with a doctorate who wanted to switch to entrepreneurship. He was specifically looking for smaller niche markets with promising growth potential. In 1967, he came across a report in the Wall Street Journal about Leslie's invention of individually coating single particles, which made a metered release of nutrients possible. A few weeks later, the two chemists teamed up with a few other investors to found Balchem Corporation and continue researching microencapsulation.

In the early days, they rented a small lab facility on the top floor of the Chemists' Club in Midtown Manhattan, before they wanted to really take off in 1970. They set up operations in a former dairy, but quickly realized they'd need to put even more time and capital into developing their encapsulation business. Balchem then founded the subsidiary Arc Chemical Corporation to produce various chemicals that were in high demand. The necessary know-how and production facilities were already there, and in this way the company built up a solid cash flow. The breakthrough in microencapsulation finally came with General Foods, whose lemon pudding was simplified by the process. Shortly afterwards, Balchem also won other food manufacturers such as Nestlé and Unilever as customers. The business kept developing nicely, and the company used its profits to make smart acquisitions. Today it employs about 1,300 people at 21 production sites in North America, Europe, and Asia.

How can Balchem develop in the future?

First, I'd like to briefly sum up Balchem Corporation's business model once more. The niche chemical company focuses on developing, manufacturing, and selling innovative, science-based solutions for the nutrition, health, and food markets. To do this, it divides its business into three important segments.

• Human Nutrition & Health: This segment generates the bulk of revenue at 57 percent and handles various flavors, nutrients, and ingredients for manufacturers of food, beverages, dietary supplements, or pharmaceuticals. The product range goes from sports drinks to baby food to the caramel flavor in ice cream and much more.
• Animal Nutrition & Health: This division contributes 27 percent of revenue. Here Blachem focuses on nutrition and health products specifically for ruminants, pigs, poultry, aquaculture, and pets. Great importance is placed on feed quality with the right minerals and ingredients.
• Specialty Products: Balchem generates about 15 percent of revenue with specialty chemicals. These are, on the one hand, special gases used to sterilize medical equipment or to fumigate spices and nuts, and on the other hand mineral solutions for the global agricultural market that allow farmers to improve the yield and quality of their crops.

Now let's take a look at the figures from the most recently reported quarter (Q3 2021 - ended September 30, 2021). Net sales for the quarter came in at $197.9 million, an increase of 13 percent over the prior-year quarter. Revenue in the Human Nutrition & Health segment rose 7.3 percent year over year to $111.2 million, revenue in Animal Nutrition & Health rose an impressive 21.2 percent to $56.2 million, and revenue in the Specialty Products segment also grew a solid 20 percent to $27.6 million. Adjusted net income also rose 11.3 percent over the prior-year quarter to $30 million - a new quarterly record. By the way, that corresponds to adjusted earnings of $0.92 per share.

Over the years, Balchem has positioned itself very well in a solid, fast-growing market. The growing world population alone should give the chemical company a promising future. Sure, if everyone stopped eating animal products overnight or even gave up processed foods entirely, Balchem (like the entire food industry) would undoubtedly have a pretty big problem. But since that's extremely unlikely, you can definitely disregard this risk. To stay competitive in the future, our niche chemist invests a lot of money in its research. Apart from that, it also makes sensible acquisitions every now and then - for example in 2019 with the two companies Chemogas and Zumbro River Brand. When I look at the overall package here, I really have to say I'm convinced. Balchem should have a bright future ahead of it.

What about the dividend?

Since 1986, Balchem has shared its profits with investors in the form of dividends. However, it has to be said that for a long time the dividend was treated as something of an afterthought - occasionally it was raised, then cut, or left unchanged. But at least it was paid every year. Since 2010, Balchem has established an annual increase in its payout - over a 10-year period, the average dividend growth rate is a solid 12.7 percent. The current dividend yield of 0.3 percent is really low, though, even if the payout ratio of 20.3 percent could well signal further increases.

Conclusion:
Balchem Corporation has positioned itself in various niche markets and has shone for decades with solid revenue and earnings growth. I'm very optimistic about the chemical company's future, but for now I'll just put the stock on my watchlist and strike on a pullback.