2 Hidden Gems in the Chemical Space

Investors who pass on boring but beautiful companies like Balchem and Stepan in favor of more popular companies operating in trendy industries are missing out on reliable growth and impressive dividend outperformance.

Mar 5, 2014 at 1:59PM

When it comes to growth investing, companies operating in trendy industries are among the most popular stock choices among investors. As a result, the majority of long-term investors overlook many utilitarian, small-cap companies. This scenario is a positive for investors seeking value along with growth, as it often means great growth at cheaper valuations.

Perhaps no industry is more overlooked than the chemicals space. The primary reason is that the industry creates products designed to operate behind the scenes and out of the public's purview.

Balchem (NASDAQ:BCPC) and Stepan (NYSE:SCL) are two of the best long-term investments in the space; both offer great growth, solid dividend performance and currently trade at relatively cheap valuation multiples.

Exciting growth
While Balchem's and Stepan's chemical businesses may be boring, the growth both companies have been churning out is anything but. In fact, Balchem and Stepan are expected to continue to grow at robust rates going forward. The following is a breakdown of the companies' projected growth in 2014 compared to industry behemoth Dow Chemical (NYSE:DOW):

CompanyRevenue GrowthEPS Growth
Balchem 9.4% 15.9%
Dow Chemical 3.4% 18.1%
Stepan 6.3% 21.4%

Both Balchem and Stepan are projected to grow sales in 2014 at much faster rates than larger peer Dow Chemical. Even though Balchem is expected to lag both competitors in the earnings-per-share category, 15.9% growth in EPS is still admirable.

Additionally, considering the above-average growth, forward-looking valuation multiples for Balchem and Stepan are not too expensive. Balchem's forward P/E of 24.8 and Stepan's forward P/E of 12.1 are lower than many popular growth stocks growing at comparable levels. 

Perhaps most impressive is that despite superior growth all around, Stepan's forward P/E of 12.2 is still cheaper than Dow Chemical's 14.1.

Growth drivers
For Balchem, continued success in its animal nutrition and health department is important. The company's latest expanded alliance with Versus Animal Nutrition assures this. Versus, formerly a supplier to Western Canada only, is now teaming up with Balchem to offer the company's animal nutrient and mineral solutions to all parts of Canada, which vastly expands the company's business in the region. 

Additionally, Balchem recently announced an agreement with Taminco to construct and operate a choline chloride facility in Louisiana. Together, Balchem and Taminco will invest to build the facility into a large scale producer of choline chloride, servicing consumers around the world. The facility is expected to go online in 2015.

On the other hand, Stepan's growth in 2014 is expected to come primarily from improving economic conditions around the world as well as positive trends in the company's main consumer markets. Continued global growth in polypol, which is used as energy saving insulant in foam installation, is expected to add significant volume growth in Stepan's polymer segment.

Additionally, the company's latest acquisition of Bayer's North American polyester resin business is now fully integrated and is set to contribute a full year of operation under Stepan control. 

On continued international expansion, President and CEO F. Quinn Stepan Jr, explained, "We plan to build a new plant in China to participate [in] what we expect will become the largest polyol market in the world. Overall, the health of our balance sheet remains strong and will facilitate investments in growth and efficiency opportunities. And that will deliver value to you, our shareholders." 

Dividend champions
Also worth noting are both companies' impressive track record of paying dividends to investors. Balchem is especially impressive in this regard. Although the company only pays a dividend of $0.26, equal to a yield of 0.50%, Balchem has raised its dividend every year in the last decade and has averaged annual dividend growth of 34.3% in that time. 

Stepan's dividend of $0.68, equal to a yield of 1.10%, is more substantial. However, despite consistently raising its dividend each year, the company has only averaged annual dividend growth of 5.5% in the last decade. 

Slide

Source: Balchem

Bottom line
Flashy companies in trendy industries are not investors' only options for growth. Often times, the smaller and lesser-known companies are better alternatives, particularly because they usually carry significantly less headline risk.

Balchem and Stepan are perfect examples of the benefits of boring but beautiful growth companies. With practical and reliable business mixes, both companies look like viable long-term investments currently trading at value prices.

Can Balchem and Stepan help you retire rich?
With approximate 10-year returns of 900% and 400% respectively, Balchem and Stepan have been long-term winners for patient investors. It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Philip Saglimbeni has no position in any stocks mentioned. The Motley Fool recommends Balchem. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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