I am beginning this text by admitting I used to be improper – or was I early?
Whereas it relies on one’s timeframe, being early is commonly the identical as being improper.
On November 11, 2022, I wrote an article titled FMC Confirms The Agriculture Bull Case. In that article, I mentioned favorable agriculture fundamentals that have been anticipated to learn the FMC Company (NYSE:FMC). Whereas most fundamentals are nonetheless sturdy, the inventory worth has declined by roughly 45% since then, making it one of many worst performers on my radar.
The excellent news is that quite a lot of weak point has been priced in. FMC is able to make a comeback as pricing is enhancing, supporting margins.
When including the corporate’s profitable product enhancements and a possible finish to stock de-stocking, FMC will get a extremely favorable danger/reward.
So, let’s get to the small print!
With an $8.2 billion market cap, Philadelphia-based FMC is likely one of the world’s largest agriculture enter gamers.
The corporate focuses on offering progressive crop safety options that tackle challenges confronted by growers with out compromising security or the setting. Their portfolio contains pesticides, herbicides, fungicides, and organic applied sciences.
In different phrases, the corporate covers all main threats: Weeds, bugs, and fungi.
FMC has strategically streamlined its portfolio over the previous decade to turn out to be a tier-one chief and the fifth-largest international innovator within the agricultural chemical compounds market. The corporate believes that its sturdy aggressive place is attributed to expertise, innovation, geographic stability, and crop variety, resulting in market share development in key areas.
|USD in Million||2021||Weight||2022||Weight|
|1,224||24.3 %||1,621||27.9 %|
|1,018||20.2 %||1,289||22.2 %|
|1,255||24.9 %||1,239||21.3 %|
Europe, Center East, & Africa
|1,040||20.6 %||1,040||17.9 %|
|409||8.1 %||467||8.1 %|
|99||2.0 %||147||2.5 %|
The corporate has a powerful agricultural product pipeline with 23 new energetic elements in discovery and 11 in improvement, with a give attention to creating new pesticides, herbicides, and fungicides with improved environmental sustainability.
What’s Going Incorrect?
The second quarter noticed a big decline in gross sales quantity throughout all areas, primarily as a consequence of de-stocking actions by growers in response to elements like elevated rates of interest affecting stock prices, improved provide chain stability, and worth reductions in sure product classes.
In consequence, the worldwide crop safety market is now anticipated to lower by a excessive single-digit to a low double-digit proportion.
FMC skilled a 30% decrease income in comparison with the prior yr, with notable declines in North America, EMEA, Latin America, and Asia.
EBITDA for the quarter was $188 million, down 48% from the prior yr, primarily as a result of quantity decline and adversarial FX influence.
As one can count on, the decline in gross sales various throughout areas.
- North American gross sales have been down 25% (24% excluding FX), with new merchandise launched within the final 5 years rising by 43%.
- In EMEA, gross sales declined by 26% YoY (24% excluding FX) as a consequence of adversarial climate and de-stocking.
- Latin America confronted a 38% decline in income, attributed to a historic drought.
- In Asia, gross sales declined by 29%, with India dealing with quantity challenges as a consequence of extra rain.
Regardless of the difficult market situations, gross sales of newer merchandise and branded diamides confirmed resilience, underlining the worth of FMC’s progressive portfolio. For instance, as I simply talked about, new product gross sales in North America noticed 43% development.
Throughout this month’s Jefferies 2023 Industrials Convention, the corporate additionally commented on stock de-stocking points (emphasis added):
I imply definitely, we have seen a big enchancment in inventories. I do suppose there are some variations relying on the place within the worth chain you’re after which quite a few experiences from a few of your peer gross sales aspect analysts in addition to from a few of our clients in public statements the place it seems U.S. stock retail ranges are very, very low. Our viewpoint on the distributor wholesaler stage, we nonetheless suppose it’s kind of elevated. So system-wide, the place is the stock nonetheless leveling out. However we have had a full rising season now that is been uncovered to this reset drive.
The corporate additionally commented on 2024. Whereas acknowledging potential headwinds, the corporate tasks sustained development, reiterating its historic outperformance and dedication to delivering worth to shareholders.
Through the Q2 2023 earnings name, the corporate gave us some optimistic feedback as effectively.
Regardless of the difficult first half, the corporate was optimistic in regards to the second half of the yr. They anticipated sturdy EBITDA margin enlargement pushed by enter value tailwinds, pricing changes, improved product combine, and disciplined working bills.
Projections indicated EBITDA margins growing by roughly 270 foundation factors in 3Q and 460 foundation factors in 4Q, with a full-year 2023 forecasted improve of about 120 foundation factors.
Sadly, 2023 is predicted to be materially weaker than 2022.
Analysts agree and see a margin restoration past 2024.
It additionally helps that FMC has a wholesome stability sheet.
Within the second quarter, the corporate issued $1.5 billion in senior unsecured notes with varied maturities to retire the 2021 time period mortgage and pay down business paper balances.
In consequence, gross debt on June 30 was $4.7 billion, up $470 million from the earlier quarter. Gross debt to trailing 12-month EBITDA was 3.8x, whereas the online debt-to-EBITDA ratio was 3.0x.
Subsequent yr, web debt is predicted to fall to 1.9x EBITDA.
That is brought on by greater EBITDA, as analysts count on 2024 to see a ten% surge in EBITDA, adopted by a smaller rise in 2025.
Valuation-wise, the inventory is buying and selling at 10x LTM EBITDA as buyers have turn out to be a lot much less bullish on agriculture.
I consider the next valuation can be utilized as soon as FMC proves it’s certainly seeing an acceleration in orders after 2023. Nonetheless, it wants greater than that. I consider that when financial development bottoms and cash flows into cyclical investments, the inventory will see a 14x EBITDA valuation – or greater. I additionally count on EBITDA estimates to be hiked within the subsequent two years.
When including a 14x a number of to present estimates, the inventory has a good worth of $131 per share, roughly 97% above its present worth.
The present consensus worth goal is $114.
At this level, one could ask why I do not personal FMC shares. That is as a consequence of my buying and selling portfolio being chubby agriculture and power. I personal fertilizer shares, and I’ve a (comparatively talking) giant place in Deere & Firm (DE) in my dividend portfolio.
I am not but certain how I can incorporate FMC into my technique, regardless of its engaging long-term valuation.
I’ll preserve a Purchase score. Nonetheless, buyers want to pay attention to the cyclical dangers that stay. We may see one other transfer decrease if financial demand additional deteriorates. This might damage crop costs and farmer margins, delaying potential mass orders for FMC’s merchandise.
So, sure, I do count on FMC to double over the following 2-3 years. However no, it will not possible be a straightforward experience.
FMC, a pacesetter within the agriculture enter sector, has confronted challenges like stock de-stocking and adversarial market situations. Nonetheless, they’re well-positioned with a sturdy product pipeline and a dedication to innovation.
The corporate’s optimistic outlook for the longer term, with improved margins and development projections, mixed with a wholesome stability sheet, suggests a brighter horizon. As financial situations stabilize and cyclical investments acquire momentum, FMC’s inventory may see important valuation upside.
Whereas I at the moment do not maintain FMC Company shares as a consequence of my portfolio allocation, I preserve a Purchase score for it. However, buyers ought to pay attention to potential cyclical dangers. The journey forward is probably not with out its bumps.