Summary
- FMC's stellar sales growth is fading.
- Low dividend yield in the current rate environment.
- Wait for a price closer to $100 with a minimum yield of 2.25%.
FMC Corporation ( FMC ) delivered remarkable sales growth in 2022, and the stock has performed well over the past year. The company expects sales growth to slow in 2023; margins might improve in the second half as inflation fades. The company's dividend yield is low for the current rate environment, but it has grown well over the past decade, and the payout ratio is low, signifying dividend safety. The stock is fully valued based on the valuation metrics. A discounted cash flow model with an optimistic growth assumption estimates that the stock is overvalued. FMC is a good stock for a long-term portfolio when purchased at a reasonable valuation and dividend yield.
Stellar revenue growth in 2022
The company reported revenues of $1.62 in Q4 2022, a 14.7% growth compared to the same quarter in 2021. The company's quarterly revenue grew by a double-digit percentage rate in 2022 (Exhibit 1) . Its organic revenue growth was 19% and 17% in Q3 and Q4 2022. Annual revenues grew by 15% in 2022, an excellent growth rate (Exhibit 2) . The company benefitted from both volume growth and price increases in Q4 2022, with volume growth of 9% and a price increase of 8%. But, the strong dollar was a headwind for the firm, reducing revenue by 2% (Exhibit 3) . The company has seen strong volume growth due to steady high-single-digit price increases in each quarter of 2022.
Exhibit 1:
Exhibit 2:
Exhibit 3:
But, the company does not expect this frantic growth pace to continue. It expects the North American Ag Chem market to grow at low-single-digit, the Latin American market to be down by mid-single-digits, the Asian market to be flat, and the EMEA market to be up by high-single-digits (Exhibit 4) . The company expects both volume growth and price increases to continue in 2023.
Exhibit 4:
FMC faces margin pressure
The company's annual gross margin has declined from 45.4% in 2018 and 45.2% in 2019 to 40.1% in 2022 (Exhibit 2) . The company hopes its margins will improve as inflation fades in the second half of 2023. Over the past decade, the company has averaged an annual gross margin of 40.3%, so its 2022 margin is within 20 basis points of its long-run average. Since 2018, the company has averaged an annual gross margin of 43.5%, so the past margins may provide a path to increasing it.
The company's operating cash flow margin has been uneven over the years, averaging 9.9% over the past decade. In 2022, the company's operating cash flow margin dropped to 10.04%, losing 600 basis points compared to 2021 (Exhibit 5) . Inflation increased the inventory cost in 2022, reducing its cash flows. But, the company stated that it is stocking up on inventory for the planting season in the Northern hemisphere. A combination of inflation and stocking up may be contributing to an increase in inventory costs. The company's free cash flow margin has dropped below 10%, reaching 7.5% in 2022 (Exhibit 5) .
Exhibit 5:
The company carried 173 days sales in inventory compared to its average over the past decade of 159 (Exhibit 6) . The company's inventory has a high variability with a standard deviation of 38. This inventory cost is the highest among the companies I have recently covered in materials, consumer staples, and the industrial sector (Exhibit 7) . The standard deviation for the days sales in inventory is the highest among the companies in the list. This high standard deviation in inventory can cause high variability in operating cash flow.
FMC's inventory data over the past decade saw a significant increase in inventory cost in 2017. The company's acquisition of Dupont's crop protection business may have increased the inventory since the company completed the acquisition in November 2017 [Q4 2017]. The company saw its inventory jump in Q4 2017, proving that the acquisition's close was behind the inventory jump. Ignoring 2017 as an outlier takes the average days sales in inventory drops to 150, and the standard deviation drops to 30, compared to 38.
Exhibit 6:
Exhibit 7:
Manageable debt but offers a low dividend yield
The company carried total debt of $3.2 billion at the end of December 2022 (Exhibit 8) . Its net debt (after cash) was $2.6 billion. The company has been paying down its debt and has decreased its total debt from $3.8 billion in June 2022 to $3.2 billion in December 2022. The company is projecting an adjusted EBITDA of $1.4 billion in FY 2023, giving it a total debt-to-adjusted EBITDA ratio of 2.28x, a manageable debt ratio.
Exhibit 8:
The company's dividend yield is a low 1.8%, which is unsuitable for dividend income seekers. The Vanguard S&P 500 Index ETF offers 1.6%, and the U.S. 2-Year Treasury yields an impressive 4.84%. Income seekers have good options in short-term Treasuries to generate a decent return on their cash. Unlike the past decade, when interest rates were close to zero, investors can wait for the opportune time and a reasonable dividend yield to invest in stocks while generating a good income. Investing in well-managed, low-leverage companies that yield less than 3% may not be worth it. But, FMC has durable earnings so investors can consider a yield closer to 2.5%. A price of about $103 would yield 2.25%. The stock is trading at $129.
The challenge is that FMC's average forward dividend yield over the past five years was a low 1.6%. But many things have changed in the last couple of years, and investors have the option to hold out for a higher yield. The dividend payout ratio is manageable, at a conservative 29%. The company has grown its dividend over the past five years and has paid a dividend for 16 consecutive years. The company's dividend has grown from $0.15 in 2006 to $2.17 in 2022, a 14x increase in 16 years.
Overvalued
FMC stock is fully valued based on the forward GAAP PE of 16.8x , comparable to its five-year average of 16.1x. The company trailing GAAP PEG ratio is 3.7x, a very high multiple. The company has the potential to grow at a single-digit pace but not much higher, so its growth rate may be capped. The rise in interest rates has increased the cost of capital for all firms, and the company's future earnings will have to be discounted at a higher rate.
A discounted cash flow model estimates a per-share equity value of $107. This model assumes a favorable short-term growth rate of 8% until 2027 and a long-term growth rate of 5% for the terminal value. A 7% free cash flow margin and a discount rate of 8% are used in the model. The company is projecting a 6% y/y increase in revenues. A price closer to $100 may make the stock worth it. The stock's 52-week low is $98.24.
Exhibit 9:
The stock had strong momentum over the past year, returning 11% over the past year, but is fading with its three-month price performance of 0.03%. The RSI and MFI technical indicators look lackluster (Exhibit 10), signaling slowing momentum.
Exhibit 10:
FMC Corporation is an essential company in a critically important industry. The company has performed well over the past year, beating the Vanguard S&P 500 Index ( VOO ) by a wide margin. But, the dividend yield is low for the current rate environment, and the company's growth is slowing from the frantic growth pace of 2022. The markets are overvaluing the stock, and investors may be better off waiting for a better price and higher yield. Until then, investors may benefit from investing in risk-free U.S. Treasuries; the 4-month U.S. Treasury yields 5%.
For further details see:
FMC Corporation: Essential, But Not When Overvalued