FMC Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

FMC is a global agricultural sciences company that develops, manufactures, and sells a diverse range of crop protection chemicals, plant health products, and pest solutions, as well as non-agricultural specialty chemicals.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

FMC is one of the largest chemical companies focused exclusively on agricultural solutions. This is an important point to make, as it means that the company is a pure play on agriculture.

Business Overview

FMC Corporation operates primarily in two segments: Crop Protection and Specialty Solutions.

  • Crop Protection: This segment focuses on developing and manufacturing insecticides, herbicides, and fungicides used by farmers globally, as well as seed treatments.
  • This is the core of FMC’s business, contributing around 85-90% of revenues.
  • Specialty Solutions: This smaller segment caters to a diverse range of customers, offering products such as lithium and other advanced materials. This is a growing part of FMC’s business that was acquired in the 2010s.

FMC generates revenue globally with significant regional differences:

  • North America: Is FMC’s strongest regional market.
  • Latin America: Has a strong presence and is a large contributor to revenue.
  • Asia Pacific: Is a growing region for FMC.
  • Europe, Middle East & Africa (EMEA): Has a relatively stable revenue base.

Industry Trends and Competitive Landscape: The agriculture industry has been facing several headwinds. Supply chain disruptions, volatile weather conditions and input cost inflation are affecting farmers globally, in turn affecting FMC’s sales and profitability. While this has had a negative impact, the demand for crop protection products is expected to increase, as farmers would need them to ensure good yields. The competitive landscape is comprised of a few major players: Bayer, Corteva, and Syngenta are competitors in the overall space, and there are also regional competitors that have influence over specific regions and products. What differentiates FMC from these is that, unlike its competitors, FMC is a pure play agriculture company. Many competitors are diversified across other sectors, whereas FMC’s entire efforts are focused on that single market. This makes the company more exposed to market fluctuations in agriculture but also provides the benefit of specialization.

Financial Analysis: FMC has posted decent revenues, but its earnings and cash flow have been hit due to supply chain issues, cost inflation, and the impact of foreign currency fluctuations.

  • Revenue: For the past few years, FMC’s revenue has grown significantly, driven by price increases and increased sales volumes. In 2022, revenue was roughly $5.04 billion, compared to roughly $4.65 billion in 2021. For the first nine months of 2023, the revenue was $3.67 billion, and management forecasts full year revenue to be around $5 billion.
  • The strong growth in revenue is due to strategic price increases and increased volumes.
  • Profitability: Net income has faced volatility in the past few years. The net income in 2022 was around $735 million compared to $1.32 billion in 2021. For the first nine months of 2023, the net income was $372 million. The drop in net income has been driven by increasing costs of production and supply chain challenges, as well as foreign currency losses.
  • Operating income has also fallen due to cost pressures and supply chain challenges. The operating income fell from $1.04 billion in 2021 to $570 million in 2022. For the first 9 months of 2023, the operating income was $467 million.
  • Margins: Gross margins have been relatively stable around 40%, however, EBITDA margins have fallen due to cost pressures. For 2022, EBITDA was $1.37 billion, and for 2023 the guidance for full-year EBITDA is in the range of $1.18 billion to $1.28 billion.
  • The decrease in EBITDA has been a point of concern for investors. The management has noted that EBITDA is still being impacted by increasing raw material and freight costs.
  • Cash Flow: As of September 30, 2023, the company had $499 million in cash and cash equivalents, which indicates a pretty comfortable financial position. The company has generated positive free cash flow over the past few years. For the first nine months of 2023, the company generated free cash flow of around -$132 million.
  • The cash flow has been significantly reduced due to lower earnings and higher inventory.
  • Debt: The debt to capital ratio is in the range of 0.55 to 0.60 which is relatively high. Total debt is $2.7 billion as of September 30, 2023. The company has increased its long-term borrowing to fund its operations and acquisitions.
  • Management has noted that it intends to reduce its leverage in the coming years. It has focused on repaying its debt and slowing down acquisitions.
  • ROIC (Return on Invested Capital): The adjusted ROIC of FMC has averaged 10-12% in the past, which is decent. With that the company had an average annual growth of around 5-7%. However, in the recent past, the ROIC is at around 7% (excluding goodwill). This drop has been due to decreased sales and revenues and increased working capital.
  • The company’s low ROIC and high debt has been a point of concern among investors. The company has indicated that increasing cash flows will have a direct positive impact on ROIC.
  • Share Buybacks: The company has been aggressively buying back its shares over the recent years. The company has done more than $1 billion of share repurchases in the first nine months of 2023.
  • The share repurchases have made the earnings per share seem better, but these repurchases do have any added value to the business itself. The share repurchases might indicate that the management does not find a better use of the cash.

Economic Moat: FMC’s economic moat is rated as 3/5: Narrow Moat. While the company’s brands are not particularly strong, it does have some form of advantage via patents and regulatory approvals.

  • Intangible Assets (Brands/Patents/Regulatory Approval):
    • FMC’s patented molecules and technology for pesticides and fertilizers are its most valuable intangible asset. Many of these patents have a limited life, and hence are not a source for a wide moat.
    • Regulatory approvals in various countries for crop protection products creates some barrier to entry for potential competitors, allowing FMC to maintain a decent competitive position.
  • Switching Costs:
  • Switching costs for FMC’s customers are medium, there are costs associated with switching crop inputs but it is not impossible. This makes it hard for FMC to raise prices too aggressively without losing market share.
  • There are several different agricultural inputs that farmers can choose from.
  • Network Economics:
    • There is minimal network effect in the agriculture sector, so FMC’s business does not benefit from network economics.
  • Cost Advantage:
    • The manufacturing and distribution for FMC are not unique, so it does not create an advantage compared to other competitors.

Legitimate risks that could harm the moat and the business resilience:

  • Technological Disruption: Changing landscape of technologies or introduction of new processes could erode the competitive advantage of existing proprietary chemicals/solutions.
  • Regulatory Changes: Changes in regulations around the use of pesticides and herbicides could be particularly damaging for FMC. Many countries have banned certain chemicals, which may affect FMC.
  • Competition: The major players in the industry are well-established, and have well-developed distribution networks, meaning that price pressures may arise. It is possible that smaller competitors can also take up market share in specific areas.
  • Commodity nature: FMC provides solutions in a commodity industry. If prices for agricultural products fall significantly, it could lead to farmers and growers not having as much cash to spend, which can result in less sales for FMC.
  • Foreign Currency Fluctuations: This poses a substantial risk for FMC, because it operates on a global scale. Foreign currencies can impact overall margins.

Understandability Rating: FMC’s business is rated as 3/5: FMC operates in the relatively well-understood agriculture sector and follows a well-defined strategy. Most people can easily understand that the agricultural industry requires a lot of crop protection products for optimal yield, and this is the base for FMC’s business. However, the various accounting rules and processes applied by the company are somewhat complicated and may need specific expertise to fully understand. The global nature of the business with different regulations in different countries may add some complexity. It requires some familiarity with agricultural businesses and the chemical industry to understand the dynamics of the business and its competitive position.

Balance Sheet Health Rating: FMC’s balance sheet health is rated as 3/5:

  • While the company has an adequate amount of cash and a strong revenue stream, the increasing debt-to-capital ratio is somewhat of a concern. The company has utilized debt for acquisitions and to fund its business operations. This increase in debt may be more problematic in a high interest rate environment.
  • Although the debt position seems high, it should also be mentioned that a large portion of the debt is from credit lines and is not due before several years.
  • Also, the company’s profitability and cash flow have been affected by ongoing external factors, so there remains some uncertainty regarding its future financial health. However, the management has reiterated their intention to reduce debt in the coming years and has also initiated measures to improve profitability.
  • The company’s tangible book value is consistently high, due to high levels of working capital and equipment.
  • The company has a good quick ratio, demonstrating its ability to cover its liabilities.

Recent Concerns and Management Outlook:

  • In the most recent earnings call, management said that it is looking to “improve production efficiencies, optimize our supply chain, and streamline our operations.” and this is to improve their profitability metrics.
  • The company was forced to reduce its 2023 guidance due to poor performance, driven by various factors such as “weather, geopolitical concerns and supply chain constraints.”
  • The company continues to aggressively buy back its own shares. Although good in terms of supporting share prices, investors are asking whether the company should focus on investing on its business or whether there are any other alternatives to deploy its capital.
  • Management has indicated that they are making significant investments in R&D and product innovations, to propel future growth. They expect the launch of new products to provide substantial future value and improve profitability.
  • The company seems to have good communication and relationship with its shareholders and is focusing more on returning value to its shareholders, and has also introduced a share repurchase program.