Demand Analysis

KEY DEMAND FACTORS

• Price and Volume – Strong as they have increased together for over a years
• Institutions and Mutual Funds – OK as 63% ownership leaves some room for growth
• Inside Ownership – Neutral as there have not been any non-open market purchases

Ratio Comparison

		ACTUALS				5 Year Averages
	2003	2004	2005	2006	2007	Actual	Projection
Valuation
P/E Ratio	20.0	22.2	21.8	25.4	24.7	22.84	22.77
Price to Sales	1.8	2.6	2.9	3.1	2.3	2.56	2.86
Price to EBITDA	9.0	11.0	11.9	13.7	12.2	11.57	12.20
Management Effectiveness
Return on Investment	11.09	14.67	16.60	14.83	13.26	14.09	17.50
Return on Equity	14.17	15.98	17.98	16.29	18.28	16.54	19.65
Financial Condition
Total Debt to Equity	0.32	0.09	0.08	0.10	0.46	0.21	0.13
Interest Coverage	33.22	59.06	2,149.88	102.06	13.90	471.62	41.82
Profitability
Gross Profit Margin	39.88	40.17	37.90	37.12	30.81	37.17	31.94
EBITDA Margin	20.30	24.04	24.08	22.53	19.27	22.04	23.60
Net Profit Margin	9.11	11.91	13.18	12.17	9.49	11.17	12.73
Dividend
Dividend Yield	0.34	0.22	0.29	0.33	0.52	0.34	0.34
Payout Ratio	0.07	0.05	0.06	0.09	0.13	0.08	0.08
Growth
P/E/G						1.67	1.02

COMPARISONS

• Valuation –projected ratios are in line with historical
• Management Effectiveness – management must improve returns
• Financial Condition – debt will need to be reduced back to historical levels
• Profitability – projections are in line with historical ratios
• Dividend – dividends are also in line with historical ratios
• Growth – even with higher price, P/E/G will be reduced to about 1.0

Earnings Projections

Balchem (BCPC)
Earnings Model (000's)
	2007	2008E	2009E	2010E	2011E	2012E	Forecast
Revenue
Specialty Products	32,924	35,887	39,117	42,638	46,475	50,658	9.0%
Encapsulated Products	49,006	54,397	60,380	67,022	74,395	82,578	11.0%
BCP Ingredients	91,036	109,243	131,092	157,310	188,772	226,527	20.0%
Total Revenues	172,966	199,527	230,589	266,970	309,642	359,762	15.8%
- COGS	119,672	137,622	158,266	182,006	209,306	240,702	15.0%
Gross Profit	53,294	61,905	72,323	84,964	100,335	119,060	17.4%
Less Operating Expense
Sales & Marketing	11,674	12,374	13,117	13,904	14,738	15,622	6.0%
General & Administrative	6,540	7,325	8,204	9,188	10,291	11,526	12.0%
Depreciation	6,153	6,399	6,655	6,922	7,199	7,486	4.0%
Research & Development	2,410	2,458	2,507	2,558	2,609	2,661	2.0%
Total Expenses & Items	26,777	28,557	30,483	32,571	34,836	37,295	6.9%
Other Income & Expense	663	829	1,036	1,295	1,619	2,023	25.0%
EBIT	27,180	34,176	42,876	53,688	67,118	83,788	25.3%
- Interest Expenses	1,955	1,760	1,584	1,425	1,283	1,154	-10.0%
Pretax Income	25,225	32,417	41,292	52,263	65,835	82,633	26.8%
- Income Taxes	8,805	11,346	14,452	18,292	23,042	28,922
Net Income	16,420	21,071	26,840	33,971	42,793	53,712	26.7%
Tax Rate	34.9%	35.0%	35%	35%	35%	35%
Dividends Paid	2,128	2,234	2,346	2,463	2,587	2,716	5.0%
EBITDA	33,333	41,501	51,080	62,876	77,409	95,313	23.4%
Shares outstanding (000,000's)	17,744	18,099	18,461	18,830	19,207	19,591	2.0%
Diluted Shares outstanding	18,544	18,914	19,293	19,679	20,072	20,474	2.0%
Earnings Per Share
Basic	$0.93	$1.16	$1.45	$1.80	$2.23	$2.74	24.3%
Diluted	$0.89	$1.11	$1.39	$1.73	$2.13	$2.62	24.3%
Source: estimates

ASSUMPTIONS

• Specialty and encapsulated product segments projected at about recent growth rates
• Ingredient segment projected at 20% growth rate which is much below recent rate
• Expenses growth will continue to grow at a slower pace than revenues

Earnings History

Balchem (BCPC)
Annual Income Statements (000's)
	2007	2006	2005	2004	2003	2002	I Yr.	5 Yr.
Revenue
Specialty Products	32,924	32,026	29,433	28,767	26,163	22,028	2.8%	8.4%
Encapsulated Products	49,006	41,565	32,499	24,759	24,043	27,990	17.9%	11.9%
BCP Ingredients	91,036	27,314	21,163	13,880	11,669	10,179	233.3%	55.0%
Total Revenues	172,966	100,905	83,095	67,406	61,875	60,197	71.4%	23.5%
- COGS	119,672	63,454	51,606	40,329	37,198	33,970	88.6%	28.6%
Gross Profit	53,294	37,451	31,489	27,077	24,677	26,227	42.3%	15.2%
Less Expenses & Items
Sales & Marketing	11,674	6,907	4,739	4,815	5,718	5,426	69.0%	16.6%
General & Administrative	6,540	5,918	4,985	4,442	4,336	3,792	10.5%	11.5%
Depreciation	6,153	3,445	2,809	3,271	3,525	2,917	78.6%	16.1%
Research & Development	2,410	2,019	2,053	1,752	2,083	1,907	19.4%	4.8%
Total Expenses & Items	26,777	18,289	14,586	14,280	15,662	14,042	46.4%	13.8%
Other Income & Expense	663	128	296	137	20	49	418.0%	68.4%
EBIT	27,180	19,290	17,199	12,934	9,035	12,234	40.9%	17.3%
- Interest Expenses	1,955	189	8	219	272	389	934.4%	38.1%
Pretax Income	25,225	19,101	17,191	12,715	8,763	11,845	32.1%	16.3%
- Income Taxes	8,805	6,823	6,237	4,689	3,125	4,429	29.0%	14.7%
Net Income	16,420	12,278	10,954	8,026	5,638	7,416	33.7%	17.2%
Tax Rate	34.9%	35.7%	36.3%	36.9%	35.7%	37.4%	-2.3%	-1.4%
Dividends Paid	2,128	1,045	685	389	382	305	103.6%	47.5%
EBITDA	33,333	22,735	20,008	16,205	12,560	15,151	46.6%	17.1%
Shares outstanding (000,000's)	17,744	17,428	17,341	16,897	16,254	16,034	1.8%	2.0%
Diluted Shares outstanding	18,544	18,247	18,085	17,468	16,868	16,723	1.6%	2.1%
Earnings Per Share
Basic	$0.93	$0.70	$0.63	$0.48	$0.35	$0.46	31.4%	14.9%
Diluted	$0.89	$0.67	$0.61	$0.46	$0.33	$0.44	31.6%	14.8%
Source: Balchem Annual Reports & SEC Filings

NOTES

• Ingredients segment has had explosive growth
• Expenses increases have increased at a slower pace than sales
• Debt has recently increased dramatically

Investor Summary

BALCHEM	Nasdaq:	BCPC
Meat Products	TARGET:	$36.29

Stock Data			Sales & Earnings	2007A	2008E	2009E
Price 11/28/2007	$21.90		Revenue (MM)	$173.0	$199.5	$230.6
52-Week Range	13.76 - 22.61		EBITDA (MM)	$33.3	$41.5	$51.1
Dividend Yield	0.5%		EPS (diluted)	$0.89	$1.11	$1.39
Capitalization			Value Measures
Shares Outstanding (MM)	17744.18		Price/Earnings	24.73	25.31	26.09
Market Capitalization (MM)	$388.6		Price/Sales	2.35	2.67	2.95
Debt/Equity	0.46		Price/Book	4.52
Projections			Growth (5 Yr.)	Historical	Projected
12-Month Price Target	$28.19		Earnings	14.8%	24.3%
24-Month Price Target	$36.29		P/E/G	1.67	1.02
Annual Total Return	29.3%

KEY AREAS FOR GROWTH

• Specialized Agricultural Products – micro-encapsulation of pharmaceutical and nutritional ingredients for animals
• Specialty Chemicals – for animal and human health and nutrition
  

MAJOR RISK
Management must improve ROI and profitability ratios.