FMC Earnings: Profits Fall on Another Quarter of Weak Demand as Inventory Reset Continues

FMC’s FMC detailed earnings results confirm our initial view that the company will likely see continued profit declines through the rest of 2023 and into 2024 due to an industrywide crop chemicals inventory reset. The company prereleased revised earnings expectations last week. With our outlook unchanged, we maintain our $110 per share fair value estimate and narrow moat rating for FMC.

FMC shares were down 9% at the time of writing. The market reacted negatively to management’s outlook for negative free cash flow in 2023 and FMC having to negotiate temporary debt covenant relief. We expect FMC will be able to receive a temporary covenant relief in the coming quarters without having to cut the dividend. We also forecast a return to positive free cash flow in 2024 as the company cuts costs and resets its working capital in response to this year’s sales decline.

We view FMC’s issues as temporary, driven by the industrywide inventory reset in crop protection products being held by retailers and distributors that are normalizing their own inventories, leading to sharply lower purchases of crop protection products. Accordingly, we view FMC shares as materially undervalued with the stock trading at less than 50% of our fair value estimate and in 5-star territory.

The current stock price implies FMC sees little revenue growth and profit margins well below the historical average, likely as a result of FMC’s top products, the diamides, going off patent. Our valuation assumes this will occur over the next several years, but at a gradual decline, rather than a sharp drop. Over time, we expect the diamides, which generated 36% of revenue in 2022, will fall to 16% of sales by 2030, as FMC’s new premium product launches become more important to its results. Over time, this will lead to EBITDA margins being restored to the mid-20% level, in line with the trailing five-year historical average, after falling to the low-20% range this year.