My original story was going to be about companies whose stocks split in the first half of 2010. However, when I came across Balchem (Nasdaq:BCPC), whose stock split three-for-two in late January, I just had to write about this company that I'd frankly never heard of. It turns out that this small-cap chemical company's stock has a 10-year annualized return of 28.6%, 31.5% better than the S&P 500. In fact, it's up 11.7% through June 14, halfway to its sixth consecutive winning year. Sure, it might be near an all-time high but I've got five reasons why it still has room to run.

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Fair Value
According to Gurufocus.com, Balchem's fair value is $24.81, the same as its current stock price. Compare this with Air Products and Chemicals (NYSE:APD), Praxair (NYSE:PX) and Airgas (NYSE:ARG), whose shares are trading at discounts-to-fair-value of 43%, 26% and 3% respectively. You'd have to be nuts to pay full freight on a stock that's trading at inflated price-to-earnings, price-to-book and price-to-sales ratios. Common sense tells value investors to pass because the margin of safety is all but non-existent when compared to its competition. But sometimes valuations don't tell the entire story. Why not just buy the cheaper stock? Because it's not indicative of the better company. Just like team sports, you always draft the best athlete available regardless of the position. This isn't any different.

Balchem & Peers




Company


Fair Value


ROA


5-Year Revenue Growth


Debt/Equity


Operating Margin


Balchem (Nasdaq:BCPC)


$24.81


15.2%


21.4%


1%


12.2%


Airgas (NYSE:ARG)


$64.86


5.1%


10.6%


84%


5.1%


Praxair (NYSE:PX)


$104.36


9.1%


9.8%


84%


14.0%


Air Products and Chemicals (NYSE:APD)


$121.92


7.7%


8.7%


78%


11.6%


Aceto (Nasdaq:ACET)


$7.18


2.2%


4.5%


0%


1.5%


Innophos Holdings (Nasdaq:IPHS)


$38.54


7.5%


0%


83%


7.6%


Return On Assets
In the last three years, Balchem has generated net free cash flow (after capital expenditures and acquisition of assets) of $31.6 million. Its one big outlay was in 2007, when it paid $40.7 million for two choline chloride businesses. Otherwise, it's taken very little to grow its assets. Compare this with Praxair whose return on assets is about 610 basis points less than Balchem. Between 2007 and 2009, it generated $1.2 billion in net free cash flow but did so by making a much greater investment. Essentially, Praxair spent 81 cents to make a buck while Balchem made the same on just 64 cents.

Revenue Growth
Balchem's five-year revenue growth is double those of its next closest competitor, Airgas. This is an exceptional feat, especially when you consider that its overall revenues in 2009 dropped by 5.4% to $219.4 million. Most of this decline was due to its Animal Nutrition and Health segment, its largest, which experienced an 8% decline to $147.7 million from $160.5 million. However, in an excellent turn of events, the same division saw its operating earnings for the year increase by 88.6% due to lower prices and greater operating efficiencies. At 18.5%, Balchem's operating margins are close to historical highs. Given this reality, a premium valuation is not without merit in my opinion.

Debt Levels
Of the six companies in the table above, only Aceto has less debt than Balchem. As of March 31, Balchem had $6 million in total debt to $155.9 million in shareholder equity. In addition, it has $51.4 million in cash. Morningstar gives it a "D" for financial health. I'm not sure what company they're looking at but the one I see has no financial concerns. Its current ratio of 3.1 is excellent and its Altman Z-Score (financial viability test) is 13.5. Any company above 2.99 is considered healthy. (What's a Z-score? Find out in Z Marks The End.)

Profit Margins
This is the one area where it actually has some competition. Praxair's operating margins are similar, perhaps even higher than Balchem's and Air Products and Chemicals are in the ballpark. Praxair's operating margin in 2009 was indeed 17.6% and Balchem's was 18.5%. For a company as large as Praxair ($23.7 billion market cap) you have to tip your hat to a job well done. If you're interested in a large cap instead of a small cap, it might be worth a look.

Bottom Line
Anytime you find a company that delivers consistent results, you can't overlook it. By every valuation metric, Balchem does appear expensive. However, there's no denying its long-term success as both a company and a stock. If you were a buy-and-hold investor, I'd take a serious look. (Check out Finding Solid Buy-And-Hold Stocks.)

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Tickers in this Article: BCPC, ARG, PX, APD, ACET, IPHS

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