It is always nice to find a small-cap stock that outperforms the majority of high-profile growth stocks but somehow still manages to fly under the radar of most investors. One of the best performing stocks that I track, Balchem (BCPC -0.25%), just so happens to be one of these small-cap beauties, and the company shows no signs of slowing down anytime soon.
Diverse business mix
Balchem is a specialty chemical developer, manufacturer, and distributor. Founded in 1967, the New York-based company employs over 300 people and services consumers primarily in the U.S. and Europe. Balchem operates in three main business segments:
- ARC specialty products: includes the packaging and distributing of hazardous materials and the selling of ethylene and propylene oxide blends, the former is used to sterilize medical equipment and the latter is used mainly as a fumigant for insect control and food contamination.
- Food, pharma, and nutrition: includes the selling of microencapsulated ingredient solutions to meat processors, drug manufacturers and flavor specialists.
- Animal nutrition and health: includes the distribution of specialty nutrients for many different animal species, including cattle, poultry and swine. The company provides encapsulated nutrients, chelated minerals and choline that help support the health and productivity of feed animals.
Balchem is a unique opportunity among small-caps because the diversity of the company's businesses allows investors to gain indirect exposure to several industries and capitalize on several major trends.
As the leading supplier of 100% packaged ethylene to the health care industry, Balchem should continue to benefit from the constant demand to maintain sterile working conditions in medical environments. Also, the company's encapsulated nutrients for feed animals are a nice way to capitalize on the world's growing need for food production. Balchem also provides chemical derivatives that are used by the oil and natural gas industry for industrial purposes, and the company stands to benefit from the ongoing fracking boom in the U.S.
Finally, although it is not often discussed, Balchem has been engaged in developing a drug that is helpful in the treatment of autism. The drug recently went through a phase 3 clinical trial, and the company recently filed a new drug application. While much is still unknown in this regard, it is just another potential growth catalyst for the increasingly diverse small-cap.
Industry-leading growth
Over the last ten years, Balchem has managed an impressive annual return of 23% for investors, and shares are up over 50% in 2013 alone. The stock's robust returns have largely been fueled by the company's impressive combination of industry-leading revenue/EPS growth and dividend growth.
The following is a breakdown of the company's projected growth rates compared to that of two similarly sized companies that operate in the specialty chemical industry, FutureFuel (FF -0.28%) and Innosphos (IPHS):
|
Company |
Balchem |
FutureFuel |
Innosphos |
|---|---|---|---|
|
Projected 2013 Revenue Growth |
11.4% |
10.6% |
-0.7% |
|
Projected 2014 Revenue Growth |
12.8% |
4.9% |
5.3% |
|
Projected 2013 EPS Growth |
16.7% |
59% |
-10.7% |
|
Projected 2014 EPS Growth |
20.8% |
-18.2% |
30.9% |
As the above data indicates, Balchem is projected to be the most consistent company by far with regard to both revenue and EPS growth in 2013-2014. In every single category, Balchem is projected to experience at least 10% growth. Additionally, the company's growth rates are expected to consistently improve going forward. This consistency is in direct contrast to FutureFuel and Innosphos, which are both expected to experience at least one year of EPS decline in 2013-2014.
It also is important to highlight the fact that Balchem has been growing at solid rates for the last 10 years. Since 2003, the company's revenue has increased over 400%, and EPS has increased a staggering 500%.
Balchem is also a champion when it comes to dividend-growth. Management has raised the company's dividend eight times in the last 10 years for a staggering 1,285% increase. Balchem has an average annual dividend increase of 32.4% over the last decade.
Buy on weakness
Since small-caps have led the market higher in 2013, many investors are understandably wary of buying into tiny companies that have witnessed substantial appreciation. However, the amount of risk with Balchem is significantly lower as the company has shown it is the real deal over the years via its impressive track record of revenue/EPS growth and dividend growth.
The company's diverse business mix, including exposure to the medical, food/pharmaceutical/nutritional and natural gas/oil industries, makes it a unique opportunity for investors. With shares off more than 10% from all-time highs, the time seems right to consider Balchem for a balanced approach to small-cap growth.
