mladenbalinovac
mladenbalinovac
FMC Corporation (NYSE:FMC) has seen some rough times in recent quarters. Experiencing pricing pressure and customer spending downturns have resulted in a sales decline of 29%. This has resulted in a stock price drop and a pessimistic outlook for the company. Excess customer inventory levels and droughts seem to have had the biggest impact on the sales decline over the recent year. Although these challenges will likely continue into 2024, FMC Corporation is working on cost initiatives to remain stable until growth can return.
FMC Corporation has initiated cost-cutting initiatives to improve its balance sheet in 2024. This starts with detailed surveys to better forecast demand to limit the impact of the excessive inventory. The company has also begun layoffs and a global restructuring plan to align cost-cutting initiatives across its business. The expected savings from these initiatives should range from $50–75 million in 2024, with additional savings up to $150 million by 2025.
New product sales also continue to keep margins afloat for FMC Corporation. The company plans to continue innovating and releasing new products as demand for these unique products continues. While overall sales have declined, margins have remained strong due to the new product's resilience. With a return in consumer spending, the company will be well positioned to capture that growth, which should raise the stock price.
When considering these current stories about FMC Corporation, we need to determine which news topics will have a long-term and ongoing effect on the company and its share price. FMC Corporation has hit some hard times in recent years. This is reflected in the large decline of its stock price from its all-time high. Consumer spending decline is forecasted to continue into 2024 due to the elevated levels of inventory held by FMC Corporation customers due to COVID-19. If FMC can succeed in its cost-cutting initiatives and maintain a stable EBITDA before a surge of growth comes from increased customer spending, the company will be well positioned by 2025.
While current news stories, good or bad, can sway our opinion about investing in a company, it's good to analyze the fundamentals of the company and to see where it's been in the past and in which direction it's heading.
This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company versus the price and help you to determine if FMC Corporation is currently trading at a bargain price. I provide various situations which help estimate the company's future returns.
In closing, I will tell you my personal opinion about whether I'm interested in taking a position in FMC Corporation shares and why.
A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer’s company rating score. FMC Corporation shows a rating score of 78.4 out of 100. In summary, FMC Corporation has strong fundamentals with some concerns about the dropping sales as well as the potential for success as growth returns and cost-cutting initiatives are implemented.
Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on.
BTMA Stock Analyzer
The share price saw a consistent rise until the recent sales declined due to elevated inventories of FMC Corporation’s consumers resulting in slowing sales. Additional pricing pressure was also impacting the sales price, but new products have stabilized the margin for FMC Corporation. 2024 sales are expected to continue to be rough which could pose a challenge for growth at FMC Corporation until 2025. Overall, the share price average has grown by about 50.9% over the past 10 years, or a Compound Annual Growth Rate of 4.68%. This is a meager return for this period.
BTMA Stock Analyzer
Earnings have steadily risen but the chart does not include the recent sales downturn after Covid-19. I expect that this chart will eventually show a decline with the recent sales decline, and a continuing decline into 2024.
BTMA Stock Analyzer
Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital.
The return on equity has followed the trend of share price and has likely seen continued decline into 2023 and 2024. In the short term, I expect continued headwinds for the company making it difficult to achieve any rise in ROE. I do believe the ROE will level off around previous levels of return. For return on equity (ROE), I look for a 5-year average of 16% or more. So, FMC Corporation exceeds this requirement.
BTMA Stock Analyzer
Let’s compare the ROE of this company to its industry. The average ROE of 68 chemical specialty corporations is 14.94%.
Therefore, FMC Corporation's 5-year average of 20.3% is above its peers.
The return on invested capital saw a sharp rise before leveling off in 2022. Capital expenditure has remained steady for the last few years. I expect some increased spending due to cost-cutting initiatives driving further need for higher return on invested capital. In 2023 and 2024, I expect ROIC to decline as the company looks to rebound. Even with the decline, I do not expect a decline below the previous lows in 2018. For return on invested capital (ROIC), I also look for a 5-year average of 16% or more. So, FMC Corporation misses the mark on this requirement.
BTMA Stock Analyzer
The gross margin percentage (GMP) has remained stable and strong over the last 5 years. Due to continued excellence in higher-margin new products, FMC Corporation continues to maintain strong margins while under pricing pressure on its main products. I expect the gross margins to remain strong even during the continued sales decline as FMC Corporation is a leader in the agriculture chemicals space. I typically look for companies with gross margin percent consistently above 30%. So, FMC Corporation is above this criterion.
BTMA Stock Analyzer
Looking at other fundamentals involving the FMC balance sheet, we can see that the debt-to-equity is less than one. The company shows low long-term debt and FMC has the ability to raise more capital, if need be, in the future.
FMC Corporation's Current Ratio of 1.52 indicates it can pay off short-term debt with its current assets.
Ideally, we’d want to see a Current Ratio of more than 1, so FMC Corporation exceeds this amount.
FMC Corporations shows a strong balance sheet relating to debt ratios. The company is also looking to pay off some of its debt by divesting its Global Specialty Solutions Business. This will provide additional liquidity for the company as it wrestles with poor growth in 2024. Overall, FMC Corporation can raise additional capital if need be and pay off its short-term debt.
FMC Corporation pays a regular dividend (currently around 3.6%).
BTMA Stock Analyzer
This analysis wouldn’t be complete without considering the value of the company vs. share price.
The company’s Price-Earnings Ratio of 14.31 indicates that FMC Corporation is underpriced when comparing FMC Corporation Ratio to a long-term market average P/E Ratio of 15.
The 10-year and 5-year average P/E Ratio of FMC has typically been 57 and 19, respectively. This indicates that FMC could be currently trading at a much lower price when comparing to its average historical P/E Ratio range.
The Estimated Value of the Stock is $79.22, versus the current stock price of around $63. This indicates that FMC Corporation is currently selling below its value.
BTMA Stock Analyzer
For more detailed valuation purposes, I will be using a diluted EPS of 5.81. I’ve used various past averages of growth rates and P/E Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.
In the table below, you can see the different scenarios, and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.
BTMA Wealth Builders Club
BTMA Wealth Builders Club
According to this valuation analysis, FMC is undervalued in every category.
This analysis shows an average valuation of around $90 per share versus its current price of about $63, this would indicate that FMC Corp. is significantly undervalued.
After analyzing the fundamentals of FMC Corporation, I have noticed that FMC has been a fundamentally strong and mostly consistent company in the past. Earnings have been mostly consistently improving as well as ROE and ROIC. Gross margins have been stable over the past 5 years. Additionally, the company is financially strong according to its balance sheet. The one temporary weakness I’ve seen is in the recent declining cash flow, but this should continue with company initiatives.
BTMA Wealth Builders Club
I believe this company has a solid chance to regain the momentum that was seen during COVID-19. The sales decline and increased pricing pressure have resulted in a sharp decline in stock price, but the company is focusing on cost-cutting initiatives in 2024. This should improve the results while the consumer spending returns as they deplete their agriculture inventory. Overall, while the company has its share of headwinds in 2024, I believe a big rebound could come by 2025.
In terms of valuation, my analysis shows that the stock is undervalued.
Now, let’s see how FMC Corporation compares versus the US stock market benchmark S&P 500 (SP500) over the past 10 years. From the chart below, FMC Corporation does not perform better than the overall market. Its recent downturn has come during a time of boom in the overall market. Throughout the last ten years, FMC has fallen short of the S&P market gains. The recent downtrend is abnormal since typically, the stock does follow the market. When considering the chart and the undervalued position of FMC, it seems like an opportune time for large upside gain potential with FMC.
Morningstar
Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 4.49%.
In addition, the average one-year price target for this stock is $63.76, which is about a 1.7% increase in a year.
The Expected Annual Compounding Rate of Return is 5.77%.
I feel that if you’re a long-term patient investor and believer in FMC, and its existing products (insecticides 59%, herbicides 29%, fungicides 7%), you could expect FMC to provide you with around 10% annual return over the long haul, and much more upside return potential if you can buy near its 6–7-year low price and hold for when the stock recovers.
But for the short-term swing trader or impatient investor, the near future of FMC might show more volatility as inflation, slowing demand, increased inventory levels, and pricing pressures fight against the stock.
FMC Corporation scored 6/10 or 60%. Therefore, FMC Corporation shows some solid fundamentals but also some risk (especially in the short-term until the company recovers).
FMC Corporation has a strong product that will continue to be needed in the long term. In the short term however, Covid-19 forced its customers to overstock its products causing inventory issues and sales decline in the recent stock prices. Pricing pressure from competition has also had impacts on the margin of its main product lines even though the company has been able to counteract this with new product sales with higher margins. FMC Corporation is a large player in the insecticide space, and I expect this price pressure from competition to be short-lived as product demand recovers. The company has many headwinds in 2024 that it must tackle until growth returns in 2025.
Due to growth being difficult, FMC Corporation has begun to implement a cost-cutting strategy to become more efficient in 2024. This will improve the short-term outlook of the company but may not provide long-term value if the talent lost during the layoff impacts how the company functions. FMC Corporation is also looking to divest part of its business to gain some liquidity and pay down its debt.
Fundamentally, this is a strong company with a healthy balance sheet. The company is facing headwinds, but I see this as an opportunity to possibly pick up some shares of this company when it gets to an irresistible beaten down price. I would consider taking a smaller stake in FMC Corporation for my portfolio, and I would be willing to hold it patiently waiting for the recovery.