2023-04-06 08:23:08 ET
Summary
- FMC Corporation has been able to capitalize on the growing demand for fertilizers to secure food supplies.
- The company is run by competent management that has been able to distribute a decent dividend and maintain a healthy balance sheet despite an ever more competitive landscape.
- With the share price being at a pretty fair level right now, I think the downside risk is limited and the company offers decent value to investors.
Investment Summary
FMC Corporation ( FMC ) is a global agricultural sciences company that offers a wide range of solutions to farmers worldwide. With a portfolio of crop protection products such as insecticides, herbicides, and fungicides, along with other agricultural products, FMC aims to support sustainable agriculture while ensuring safety for people and the environment.
The company operates across 60 countries and serves diverse crops, including fruits, vegetables, corn, and soybeans. This has netted the company a very diverse set of revenue streams that are all in high demand right now and it's likely to stay that way for the foreseeable future.
With a forward p/e of 15 buying at these prices seem to offer little risk and instead some upside potential. Given the market growth that is expected, around 5% CAGR and a decent dividend yield currently, I think FMC displays a stable investment opportunity right now and something that can capitalize on growing trends.
Catalyst
FMC Corporation is a company that I think stands to benefit from the growth in the agriculture industry due to the rising demand for food and the adoption of fertilizers to secure food production. The US Crop Protection Chemicals market is expected to reach around $66 billion in size by 2030 according to GrandViewResearch, representing a CAGR of 5% between 2023 and 2030. Despite weather-related challenges, the company has been able to maintain strong operational performance thanks to its manufacturing and logistics flexibility.
The company plays a very important role in making sure we as a society have stable sources which we can grow and supply food from. Be that wheat, corn, or soy. They are all necessary parts to battle hunger. I think that the runway for FMC Corporation is long and bright. The company has been able to grow at steady paces and maintain a healthy balance sheet even paying out a dividend.
Even though commodity prices might drive some of the demand for FMC, in my opinion, the company is quite hedged and stable in terms of revenues. I don't expect them to be inconsistent as the management is making the right moves to secure long-term contracts .
Risks
As with any industry, there are risks involved in the world of fertilizers. One such risk is price volatility. Due to factors such as changes in supply and demand, weather events, and input costs, prices can fluctuate, which can impact the profitability of fertilizer producers and, ultimately, affect the prices farmers pay for their fertilizers.
Moreover, environmental regulations designed to reduce the environmental impact of fertilizers also pose a risk to the industry. These regulations can increase the cost of production and distribution, leading to higher prices for consumers. Furthermore, regulations may limit the availability of certain types of fertilizers, potentially creating additional challenges for both producers and farmers.
But even though there are challenges for FMC, I expect there to be little friction for them to sell their product and service. They offer something we are in dire need of to secure food and satisfy demand. Until better methods are developed I think FMC will continue to thrive.
Financials
FMC Corporation's balance sheet shows a healthy financial state in my opinion. Total current assets as of December 31, 2022, were $5,438.6 million, which is an increase of $384.8 million from the previous year. Cash and cash equivalents increased by $55.2 million, from $516.8 million in 2021 to $572.0 million in 2022. This is a great sign as I value a company that builds up a war chest to make investments to maintain market share when competition increases.
The company's inventory increased from $1,521.9 million in 2021 to $1,651.6 million in 2022, indicating that the company is increasing its production or purchasing more raw materials for production. The increased demand for the market is something that FMC seems to be able to satisfy and also keep up with. It has so far netted them a ROA of 6.59% which I think is quite impressive but also something I will be watching closely. If perhaps demand slows down, this build-up of inventory could turn into a liability instead for the company. But again, I am not under the impression this will happen in the near future at least.
Long-term debt, less the current portion, remained relatively stable at $2,733.2 million in 2022 compared to $2,731.7 million in 2021. Only a slight increase which I think is very manageable given, especially as the company generated almost $700 million in cash flows in the last 12 months.
Valuation & Wrap Up
Right now I think the valuation of FMC Corporation is quite fair. Trading at a forward p/e of just 15 I don't think this is a risk full speculation of an investment. Instead, it's based on growing trends and demand for a product they offer. Of course, there might be some hurdles along the way, but I think FMC will come out on top.
Looking at the valuation a little bit closer, one worrying sign might be the price/cash flow of 26, which is significantly higher than the industry average. With the company generating perhaps slightly less cash flow, the question about the dividend might arise. I'm not against the thought of cutting the dividend to focus that money on building out the business further and securing market share. But with a ROC of almost 12% the dividend might be safe and proof why the company can trade above the industry average given the obvious quality they offer.
All in all, I think the current price is not expensive and will rate it a buy. Apart from being able to collect a dividend, the company also has a good history of buying back shares, which further would boost shareholder value.
For further details see:
FMC Corporation: Looks Like A Decent Deal