2023-06-09 09:31:28 ET
Summary
- FMC Corporation maintains a buy rating due to its ability to expand margins and generate cash flows, with a strong outlook for 2023.
- The company's diverse portfolio and new product developments give it an edge over competitors, with 15% of Q1 2023 revenues coming from products launched in the last five years.
- Despite risks from volatile fertilizer prices and weather conditions, I believe FMC's robust balance sheet and growth in North American markets make it a solid long-term investment opportunity.
Investment Summary
FMC Corporation (FMC) is a global company in the agricultural sciences sector, providing farmers worldwide with a diverse range of solutions. Their portfolio comprises crop protection products, including insecticides, herbicides, and fungicides, along with various other agricultural offerings.
The diverse nature of the company has played out in their favor as they are expecting to grow revenues YoY, despite the pricing environment being much softer at this time compared to 2022. In my last article about the company, I rated them a buy, and I will be maintaining that rating. I see FMC as a very solid business that is able to expand margins and generate cash flows which then get divested to shareholders. Just in the first quarter of 2023, they returned $100 million to shareholders, $25 million of which was used to share repurchases. With FCF expected to remain strong, I think FMC can offer a lot of value at these prices for a long-term position and will have a continued buy rating from me.
Strong Outlook As Margin Improves
Looking ahead, unlike many other companies related to fertilizers or crop protection products, FMC is expected to see an increase in both their top and bottom line for 2023. Just looking at The Mosaic Company (MOS) for example they are estimated to see a few difficult coming years with decreasing earnings. Much of the reason I think FMC is outperforming is the steady development of new products, which the company notes has been a revenue driver and will continue to be too. The revenues are expected to grow 6% YoY, which perhaps isn't that impressive, but it should be said the fertilizer market doesn't have the same pricing environment it did a year ago when supplies were low and prices skyrocketed.
2023 Outlook (Investor Presentation)
With this, the company also sees FCF coming in between $530 - $720 million, which on the higher end would be a solid improvement over the FCF of 2022, that where just under $600 million. With this amount of cash flows the company will be able to easily support their dividend price tag of $220 million for the full year of 2023. Regarding share repurchases I don't see them buying a large portion in the next quarter, but as the company noted they will do that in the second half of the year instead, as their cash flows are rather seasonal. As for guidance of shares outstanding, FMC sees shares decreasing from 126.5 million to 126.1 million for 2023. But I am hopeful it might go lower if we see strong cash flows in the coming quarters.
Cash Deployment (Investor Presentation)
Some of the drivers the company has for its growth are the new products they are consistently developing and getting on the market. This seems to be bringing them an edge over the competition. For Q1 in 2023, 15% of the revenues were from products developed and launched in just the last 5 years. The market in North America has helped the last quarter's results as the pricing environment is improving and FMC has been able to grow margins as a result of it. EBITDA margins up 60 bps is a great improvement and watching if it can carry through into Q2 will be interesting. The record sales in North America and Canada were also a result of FMC being able to take more market share and the launch of Altacor Evo represents another revenue stream for the company. But it's worth noting, the total company revenues stayed flat YoY, as the markets in Asia and Latin America decreased significantly, -22% and -12% respectively, much because of harsh weather and droughts.
I think FMC has proven itself a robust investment opportunity that can throughout softer pricing environments still manage to grow revenues. Even though fertilizer prices are lower than a year ago, FMC being able to expand margins makes me more confident in rating them a buy. The guidance the company has presented seems well within reach if they keep up the momentum and I think as we hopefully enter a more stable market environment FMC will solidify their margins and expand them further also. Which makes the current price a very intriguing entry point.
Risks
One of the significant challenges faced by the fertilizer industry is the inherent volatility in the prices of essential raw materials like natural gas and phosphate rock, which are crucial for fertilizer production. The industry is susceptible to various factors such as weather patterns, geopolitical issues, and shifts in global supply and demand, all of which can contribute to price fluctuations and create uncertainties.
So far it seems that FMC is handling the risks quite well with volatile fertilizer prices, and as they have their own line of products they are able to offset some of the costs to customers, as seen in the last report. Some of the headwinds they are noting are the lower volumes of certain markets where FMC has managed to establish a foothold.
Financials
Looking at the financials of the company, they have been able to grow the current assets 11% on just a QoQ basis. Going from $5.5 billion to over $6 billion. This was driven by an increase in the inventories the company has, an increase of close to $300 million was seen here. But it's worth saying as well that the cash position for FMC has been decreasing, perhaps to cover the dividend expenses for the quarter and buy back shares. But with nearly $500 million in cash, they can make a serious impact on long-term debts of $2.3 billion.
As mentioned, the cash flows for the company are expected to come in at around $720 million on the high end which would provide FMC with a lot of capital available to pass on to shareholders. But I think given FMC has nearly $2 billion in current debt, a significant portion of the cash flows should be used to pay this off and create a less leveraged balance sheet. The company does have a slightly high net debt/EBITDA ratio right now of 2.72. Above 3 and I would be considering making this a hold rating instead. But given they are growing margins at a decent rate and have been able to overcome a lessened demand in some markets, I still view them as financially sound right now with debts not presenting a massive risk.
Company Long-Term Debt (Macrotrends)
But with that said, in Q2 I would like to see an increase in the cash position which will help cushion the company and give them a bit more room to work with. As they are developing new products to gain market share, the necessity of taking on debt to fund that is of course there. But I don't want to see an increase in the long-term debts until there is a higher net margin which will help offset the risk that taking new debt brings. All in all, though, FMC has a robust balance sheet that doesn't present any significant dangers currently in my view.
Valuation & Wrap Up
Right now, I think FMC offers investors a solid opportunity to capture demand for crop protection products as the North American market especially has grown increasingly more reliant on it. FMC has so far been able to grow revenues quickly here thanks to new products helping take market share away from competitors. Whilst other regions like Asia and South America have seen decreased demand, it's much because of weather conditions like drought. In the long term, I still see FMC having a significant presence in those markets and 2023 will simply be a difficult year.
The outlook for 2023 is unlike other fertilizer-related companies as FMC is expecting to see growth in both the top and bottom lines of the business. With strong cash flows still being generated, the value that shareholders can extract here seems very high. Paying a 13x premium for forward earnings seems rather fair given the growth FMC is expecting and the over 2% dividend yield. I see further upside from here, especially given the share price decrease we have seen over the last few months. The whole fertilizer sector seems to have seen a compression in valuation and that brings an opportunity for investors to get in at a dirt-cheap valuation.
Conclusion
FMC has strong outlooks and has proven itself able to maintain margins and deliver value to shareholders. The quality of the business paired with the robust strength of the company makes me rate them a buy still.
For further details see:
FMC Corporation: Margin Expansion Supports The Buy Case