FMC Corporation: Growing Demand with Mixed Q3 Earnings (NYSE: FMC)
FMC Company (New York Stock Exchange: FMC) will grow as improved crop yields are needed to support rising food consumption, especially in emerging markets led by India and sub-Saharan Africa. Limited expansion options arable land in most areas means higher yields are needed. FMC can provide excellent covered call premium and dividend yield even if the stock isn’t moving much.
FMC is a chemical company that provides grower solutions with a portfolio of products including crop protection, crop enhancement, and professional pest and turf management. Its insecticides fight pests, while its herbicide portfolio is used to control weeds. The company has diversified its sales to create a balanced portfolio of crop chemicals across geographies and crop exposure. Through acquisitions, FMC is now one of the top five proprietary crop chemical companies. It will continue to develop new products, with a focus on biologics, through its research and development pipeline.
Farmers will pay for more crop protection applications when crop prices rise. When crop prices fall, farmers look to cut expenses, including crop protection products, but FMC’s strong portfolio of new premium products helps farmers tackle tough pests. In an environment of low crop prices, farmers tend to continue paying for higher quality crop protection products because they prevent crop yield losses from pests, even if they reduce applications. more generic crop protection.
The company plans to launch ten new molecules over the next decade that feature novel modes of action. FMC will introduce new organic or environmentally friendly pesticides and increase its exposure to these products by acquiring BioPhero. Organic products should help farmers fight resistant pests, which are increasingly rendering old crop chemicals ineffective.
Please click here if you would like to watch a two minute video on FMC.
FMC Acquisition of BioPhero
Below are slides I have selected from their June 30, 2022 presentation on the company’s website. They acquire BioPhero, a Denmark-based company with $200 million in cash. BioPhero has a patented synthetic biology platform that enables production at a significantly lower cost than current standards. FMC’s revenue potential from the acquisition is approximately $1 billion with an above-average EBITDA margin by 2030, with commercial sales beginning in 2024.
BioPhero has important new products in its pipeline.
The combined companies will benefit from multiple synergies towards increased profitability.
FMC has annual sales of $5.6 billion with 6,400 employees. They are 91.9% held by institutions, with only 1.5% short interest. Their return on equity is 20.3% and they have a return on invested capital of 11.7%. The free cash flow yield per share is 2.5% and their redemption yield per share is 0.6%. The price-to-book ratio is 5.1. Their Piotroski F score is six, indicating some strength.
Third Quarter Results and Full Year Outlook
Some may think their quarterly press release showed good results because they beat analysts’ estimates. It’s good, but I’m not very impressed. Third quarter revenue of $1.38 billion increased 15% from the third quarter of 2021 and increased 19% organically. However, adjusted earnings per diluted share of $1.23 was down 14% from Q3 2021.
Third quarter EBITDA versus last year was helped by increased volumes, product mix and product launches, as well as price increases. But cost increases and currency headwinds more than offset the gains.
During the quarter, adjusted EBITDA fell 11% as cost inflation outpaced price increases. However, the company should be able to continue to raise prices, allowing it to increase its margins as cost inflation declines, ultimately leading to stable earnings growth.
Below is their full-year outlook from the Nov. 1 press release.
- Raises revenue outlook to range of $5.6-5.8 billion, reflecting 13% mid-term growth versus 2021;
- Narrows adjusted EBITDA outlook to range of $1.37-1.43 billion, reflecting 7% mid-term growth versus 2021;
- Cuts the outlook for adjusted earnings per diluted share to a range of $7.10 to $7.60, reflecting 7% mid-term growth over 2021, excluding any impact from share buybacks potentials of 2022;
- Reduced the free cash flow outlook to a range of $440-560 million, reflecting the increased revenue outlook and inflationary impacts on working capital;
- Provides up to $200 million in share buybacks, including $100 million completed in October;
The revised outlook for the full year is not significantly different from the previous forecast. The revenue forecast was $5.5 billion to $5.7 billion. The adjusted EBITDA outlook was $1.36 billion to $1.44 billion. The outlook for Adjusted EPS was $7.00 to $7.70.
Technical entry point
FMC’s stock price is trading at $125.00 on November 11. I added the green Fibonacci lines, using FMC highs and lows over the past five years. It is interesting to note how the market stops or bounces on these Fibonacci lines. They can be a clue as to the direction the stock price may be heading. FMC is above the 23.6% Fibonacci retracement level but could go lower. However, I believe FMC will be trading at $130.00 or higher by June for the reasons of this article.
The six most accurate analysts have a one-year average price target of $134.83, indicating a potential upside of 7% from the November 11 trading price of $125.00 if correct. Their odds are mixed with five buys and one sell. Analysts are just one of my indicators, and they’re not perfect, but they’re generally within the range of estimates. They often seem a little bullish, so I suspect prices could end up falling below their one-year targets to be on the safe side.
Trend of earnings per share, P/E ratio and net margin
The black line shows FMC’s stock price over the past twenty years. Look at the table of numbers below the chart to see FMC’s steady growth. The earnings were $3.64 in 2019, $4.24 in 2020 and $5.72 in 2021, and they are expected to earn $7.36 in 2022 and $8.32 in 2023.
The P/E ratio for FMC is currently at 17, but the average ratio over the last ten years is 24. I don’t think the P/E will go back up to 24 anytime soon. If FMC gains $8.32 in 2023, the stock could trade at $133.12 if the market only assigns a P/E ratio of 16.
FMC has had relatively stable net margins close to 10% over the past ten years.
Sales, earnings per share and share price have appreciated since 2016.
Sell Covered Calls
My answer to the uncertainty is to sell covered calls on FMC five months from now. FMC was trading at $125.00 on November 11, and April’s $130.00 covered calls are at or near $8.10. A covered call requires the purchase of 100 shares. Selling an April covered call will allow the investor to collect dividends in December and March at $0.53 each. The stock will be canceled if it trades above $130.00 on April 21. It can even be canceled earlier if the price exceeds $130.00, but that’s okay since the capital is paid back sooner.
The investor can earn $810 from the purchase premium, $106 from dividends and $500 from stock price appreciation. This totals $1,416 in estimated profit on a $12,500 investment, or an annualized return of 25.6% since the period is 161 days.
If the stock is below $125.00 on April 21, investors will still make a profit on that trade up to the net stock price of $115.84. Writing covered call options and collecting dividends reduces your risk.
I expect FMC Corporation shares to appreciate as demand for their new and existing products remains strong. Inflationary pressures should ease in 2023 and FMC can continue to raise prices if necessary. Even if FMC’s stock price only drops from $125.00 to $130.00 by April 21, a potential annualized return of 25.6% is possible, including covered call premiums and dividends.