Down 60%, FMC Corp. Has Develop into An Extremely Deep Worth Play

Introduction

On September 29, I wrote an article titled Why FMC May Fly As soon as Demand Improves. Again then, the inventory was down roughly 45% since November 2022.

Sadly, since my bullish article, the inventory is down one other 20%, making it the second-worst sell-off in its historical past. The sell-off is now a lot worse than through the Nice Monetary Disaster and a bit worse than the pandemic-related inventory value implosion.

The FMC Company (NYSE:FMC), which is one the biggest agriculture enter gamers on the earth, has a serious footprint in pesticides, herbicides, fungicides, and associated merchandise.

Though agriculture operations are sometimes anti-cyclical (all of us have to eat), its enterprise is way from anti-cyclical.

FMC is presently affected by an unwinding of things that pushed its inventory value greater after the pandemic. World stock destocking is hurting demand, pricing is down, and future expectations from analysts have been considerably adjusted.

The excellent news is that after dropping greater than 60% off its highs, a lot unhealthy information has been priced in.

Even higher, the corporate sees a path to robust progress after 2023, agriculture fundamentals are more and more wholesome, and the main target is on debt discount.

Whereas FMC stays a extremely speculative commerce (I choose much less unstable dividend progress shares), the inventory has gotten so enticing that I am contemplating shopping for FMC at these ranges.

So, let’s get to it!

3Q23 Was A Complete Mess

On the finish of October, FMC reported its earnings after it had warned traders that it encountered extra weak point than initially anticipated.

Therefore, it began its third-quarter earnings name by acknowledging the continued industry-wide destocking exercise through the quarter.

The worth chain is adjusting stock ranges in response to heightened safety of provide and elevated rates of interest.

Latin America, usually a powerful contributor in Q3, skilled a extra extreme decline than anticipated as a result of underestimated destocking.

In different phrases, due to greater funding prices, it’s dearer to maintain excessive inventories of merchandise like plant safety. On high of that, I consider the decline in crop costs has put some strain on farm earnings, which provides to the necessity to run operations with decrease inventories.

Consequently, Q3 income noticed a 29% YoY lower, each together with and excluding foreign money adjustments.

As we simply mentioned, this decline was primarily attributed to decrease volumes ensuing from channel destocking, significantly in Latin America.

Whereas gross sales had been down considerably, the appliance of crop safety merchandise remained regular and, in some nations, even elevated in comparison with the prior 12 months.

North America: Gross sales had been down 34% YoY, pushed by destocking exercise. EMEA: Comparatively flat gross sales with a 1% decline and 4% excluding FX. Quantity noticed strain from channel destocking, partially offset by greater costs and robust diamide gross sales. Latin America: Gross sales had been down 33%, 36% excluding FX, as a result of destocking, particularly in Brazil and Argentina. FMC had a profitable launch of Branded Diamide Premio Star in Brazil. Asia: Gross sales declined by 28%, 23% organically, impacted by destocking, significantly in India. New merchandise launched within the final 5 years confirmed resilience.

EBITDA got here in at $175 million, down 33% YoY, attributed to quantity decline and a smaller pricing headwind, partially offset by decrease prices.

The Future Seems to be Vibrant

One of many worst issues of the third quarter was the corporate’s feedback concerning the way forward for the agriculture market.

Whereas some traders might have anticipated a state of affairs the place demand bounces again laborious, the corporate mentioned to maintain expectations low.

Going ahead, the corporate anticipates that the market is not going to expertise a snapback restocking interval after world destocking concludes.

As an alternative, they count on the crop safety market to develop from the reset stock base at a extra historic progress fee.

Throughout this month’s Investor Day, the corporate reiterated this name.

As seen within the chart beneath, over the previous 40 years, the market has grown at a fee of about 3%, pushed by elements reminiscent of commodity costs, agronomic practices, and developments in crop genetics.

Since 2010, above-average progress has been attributed to robust commodity costs, regulatory adjustments, and elevated demand for meals, biofuels, and animal protein.

Each 2009 and 2015 noticed comparable stock buildups, leading to strain on the FMC inventory value.

Whereas the corporate is acknowledging the issue in forecasting the market measurement for 2023, it anticipates a excessive teenagers p.c decline.

Wanting forward, the corporate foresees low to mid-single-digit progress within the world crop safety market over the subsequent decade, influenced by elements like commodity costs, know-how adoption, rates of interest, meals safety issues, and excessive climate occasions.

To attain outperforming progress on this market, the corporate has a deal with market segments poised for quicker progress, significantly biologicals, anticipated to develop at a fee probably 10x that of the general market.

Throughout the current Investor Day, the corporate mentioned its present crop safety portfolio, together with diamides, plant well being merchandise, and the brand new pipeline of energetic elements.

FMC initiatives that these will collectively contribute greater than 35% of whole income by 2033.

Moreover, 2023 is predicted to be the underside in earnings.

Whereas 2024 expectations embody ongoing destocking impacts, FMC expects income of $4.65 to $4.85 billion, an 8% improve in EBITDA in comparison with 2023, with a deal with profitability and debt paydown.

Seeking to 2033, FMC goals to outpace the market in income by 1.5 to 2x, obtain a mid-20s EBITDA margin, preserve mid-teens return on invested capital, and no less than 70% free money movement conversion.

Within the meantime, to handle challenges, FMC introduced rapid steps, together with a restructuring plan concentrating on $50-75 million in financial savings by 2024 and $150 million by 2025.

This additionally consists of decreasing debt.

As we are able to see beneath, the corporate’s leverage ratio was effectively inside its goal vary – till world destocking began. In any case, the online leverage ratio depends on each web leverage and EBITDA. Even when debt ranges stay unchanged, decrease EBITDA causes the debt ratio to extend.

In 1Q24, the corporate expects peak leverage, supported by a normalization in working capital.

Analysts count on the corporate to scale back web debt from $3.8 billion on the finish of this 12 months to lower than $3.0 billion by 2025. When incorporating a restoration in EBITDA, the online leverage area is predicted to enter the two.3x to 2.4x EBITDA vary once more in 2025.

The corporate has an investment-grade BBB credit standing from Customary & Poor’s.

Valuation

Utilizing present analyst estimates and valuation numbers (all seen within the chart beneath), we see that the inventory is buying and selling at a blended P/E ratio of 12.7x.

Moreover:

Going again twenty years, the normalized P/E ratio is 15.7x. This 12 months, EPS is predicted to say no by 48%, making it the worst decline in its historical past. Subsequent 12 months, EPS is predicted to extend by 14%, adopted by 20% progress in 2025. A return to a 15.7x a number of by incorporation of anticipated progress charges would pave the street for a THEORETICAL return of 26% per 12 months via 2025.

Until we enter a deep recession, I consider that is a practical potential efficiency, which might give the inventory a value goal of roughly $83, which is 54% above the present value.

I additionally want to say that that is primarily based on information after large changes.

Six months in the past, analysts anticipated the corporate to generate $8.84 in 2024 EPS. Now, that quantity is $4.40! The identical goes for 2025 estimates, the place the EPS projection has gone from $10.07 to $5.35.

In different phrases, if the corporate enters a brand new cycle of recovering demand and pricing, it may benefit from each a low inventory value and earnings upgrades down the street.

As soon as analysts begin upgrading their outlook for the corporate, the valuation turns into way more enticing.

With all of this in thoughts, I consider that FMC gives deep worth.

I am contemplating shopping for it at these ranges, as I count on to have the ability to promote it at a lot greater costs a couple of years from now.

The one purpose why I have not purchased it’s as a result of I am determining methods to handle my present money. I’ve plenty of shares I wish to purchase and have to determine methods to stability long-term investments and shorter-term trades.

I am additionally ready for extra readability on how a lot I am going to must pay in taxes for this 12 months, which might have a a lot larger affect on my money than I initially anticipated.

Additionally, please remember that FMC Could be very unstable. It is not your typical long-term (dividend) funding. We might additionally see some extra draw back in case we’re in for a full-blown recession.

That mentioned, the long-term danger/reward appears to be very enticing to me.

Takeaway

Regardless of FMC’s current challenges and a turbulent market, I discover its present valuation extremely compelling.

The numerous drop in inventory value, pushed by world destocking and market uncertainties, presents a chance.

In the meantime, FMC’s strategic deal with faster-growing segments, debt discount, and price financial savings units the stage for restoration post-2023.