FMC could benefit from rising prices for agricultural commodities and a sharpening focus on sustainable crop-protection solutions. Here, tiered farms in the Philippines.
Courtesy FMC
Soaring food prices because of a war is a lousy reason to chase commodity stocks—but they’re a great reason to take a look at FMC .
Shares of FMC (ticker: FMC) have gained 9.2% this year, buoyed by rising crop prices following Russia’s invasion of Ukraine and expectations that they will lead to greater profits for the pesticide maker. Normally, these kinds of moves should be “faded,” a contrarian strategy that trades against a prevailing trend. After all, what goes up because of a temporary supply disruptions—in this case, the war—usually comes down.
But in the case of FMC, rising prices can be the catalyst investors need to take another look at a high-quality specialty-chemical producer that had a difficult 2021. After underperforming peers like Corteva (CTVA) and, barely, Bayer (BAYN.Germany), which acquired Monsanto in 2018, FMC’s stock should benefit from its low valuation, suddenly cash-rich farmers, and a sharpening focus on sustainable crop-protection solutions. While higher ag prices aren’t likely to last, FMC the stock looks like it can continue to rally.
FMC isn’t a household name. The Philadelphia-based chemical maker creates products designed to help offset supply shocks while growing the global food supply. The industry produces conventional and genetically modified seeds along with herbicides, fungicides, and insecticides that help farmers improve crop yields and reduce yield volatility.
Unlike its competitors, FMC sells chemicals, not seeds. The company is expected to generate sales of about $5.4 billion in 2022 in a market with revenue of some $65 billion annually for agricultural chemicals. Back when Bayer bought Monsanto, and when DuPont and Dow Chemical merged and then combined their seed and chemical operations to form Corteva in 2019, investors wondered if selling only chemicals would be a competitive disadvantage.
FMC Chief Executive Mark Douglas rejects that notion. “We are agnostic on whatever seeds our competitor sells or whatever seeds our customers buy,” he says. “Our job is to bring the latest technology to help.”
That wasn’t the case in 2021, however. FMC’s stock dropped 4% last year, while the S&P 500 gained 27%. It wasn’t a pesticide-company problem, as Corteva rose some 22%. FMC stock fell even as its earnings grew about 12% compared with 2020.
Douglas blames it on a misunderstanding. Analysts “got hold of the notion that we were going to take volume, rather than raise prices to offset inflation,” he says. “We were raising prices. We always do; we grow our share through technology. It took a few quarters for people to get a real message.”
That renewed confidence can carry over into the rest of 2022, says Fermium Research analyst Frank Mitsch. FMC’s organic sales are set to rise between 5% and 7%; earnings before interest, taxes, depreciation, and amortization, or Ebitda, are on pace to increase by 7% to 9%; and earnings per share could grow by 10%, he says. “The early look at 2022 suggests that FMC is back on its longer-term sales/profit objectives,” says Mitsch, who has a Hold rating on the stock.
While higher farm prices aren’t reason enough to buy FMC stock, they could provide a longer-term boost to its earnings. The Russian invasion of Ukraine functions almost like a weather-derived supply shock, which tends to push up agricultural commodity prices. Those prices put more cash into U.S. farmers’ pockets, which makes it easier for agricultural suppliers such as FMC to raise prices.
Inflation cuts both ways, and whether price and volume gains can offset rising costs is something to watch. FMC dealt with that successfully in the fourth quarter of 2021, and RBC analyst Arun Viswanathan believes that can continue in 2022.
Still, counting on spiking commodity prices isn’t a long-term strategy for value creation. Douglas realizes that, and points out that FMC spends roughly 6% of its annual sales on R&D. What’s more, his company is moving into more-sustainable technologies to control pests, weeds, and funguses. “We’ve invested in peptides, enzymes—this is all new to the agricultural space,” says Douglas.
Those investments should start to pay off. “Longer term, we are excited by FMC’s investments in biologics, fungicides, and its partnerships, all of which should increase FMC’s market access and could lead to top-line and Ebitda upside,” writes Viswanathan, who has an Outperform rating and $135 price target on the stock.
FMC now has some catching up to do. Shares trade at just 15 times Wall Street’s 2022 earnings estimate of $7.73 a share. That’s cheaper than Corteva’s 20 times earnings, as well as the S&P 500’s 18 times.
While Corteva might deserve a premium—it’s expected to grow earnings at about 17% a year on average for the next two years—the S&P 500 is forecasted to grow earnings by just 8% to 10% over the next couple of years.
With FMC stock, it looks as if investors get above-market growth for a below-market price. If the stock can get a market multiple, shares could trade at about $157 a share by the end of the year, up 31% from a recent $120.
Write to Al Root at [email protected]
