FMC: Boosting Yields (NYSE:FMC) | Seeking Alpha

It has been a long time since I looked at FMC Corp. (NYSE:FMC). In the spring of 2017, I concluded that FMC was a clear winner in the DuPont asset swap, as it acquired the Crop Protection business from DuPont.

The transaction was a bit more complicated, as it involved the sale of the Health and Nutrition businesses by FMC to DuPont. Furthermore, FMC threw in a $1.2 billion cash payment to enable these transactions.

A Look Back

With DuPont contemplating a merger with Dow Chemical a few years ago, the European Commission demanded the divestment of the crop protection business, as FMC had risen to that occasion to buy these activities. Given the multiple transactions, there were many moving parts at the time for one of the largest herbicides and crop protection providers out there.

FMC had 134 million shares outstanding at the time, translating into an equity valuation of $8.2 billion at $61 per share. The enterprise valuation stood at $10 billion at the time if we factor in $1.8 billion in net debt. This enterprise valuation was equal to roughly 14 times EBITDA, which was steep enough.

The really interesting thing is that with a $1.2 billion cash payment, FMC has on a net basis acquired $275 million in additional EBITDA, arguably creating great value in the process. The business posted earnings of $2.82 per share on an adjusted basis in 2016, translating into a high valuation at $60 per share. Given the great transaction, I thought that FMC could see earnings increase by nearly a dollar as a result of the deals.

Note that investors liked the deals a lot as well as shares rose to the $70 mark in response to the deals being announced, as exactly this move higher made me cautious to get involved with FMC at the time.

What Happened?

The truth is that in the five years since the deal with DuPont in 2017, shares of FMC have rather steadily moved higher, as they traded largely around the $100 mark. Shares started 2022 in the low $100s as they rose to $140 in a peak in the spring amidst concerns about global food supply and soft price inflation, as shares have fallen back quite a bit to $107 per share in recent weeks.

Fast forwarding to early 2022 FMC posted its results for the year 2021, a year in which revenues were up 9% to $5.05 billion. Profitability metrics were still very sound, as EBITDA rose 6% to $1.32 billion. GAAP earnings come in at $5.70 per share, or $736 million in actual dollar terms. Adjusted earnings were up 12% to $6.93 per share, with most of the discrepancy stemming from discontinued operations and restructuring efforts. Net debt of just over $2.6 billion works down to a leverage ratio around 2 times.

The company guided for a solid 2022 with revenues seen up 7% to a midpoint of $5.40 billion, with adjusted earnings seen between $6.80 and $8.10 per share, at a midpoint of around $7.50 per share. Needless to say, valuations are not that demanding at around 14 times adjusted earnings this year. So if we summarize the developments over the past five years, the company has seen solid growth, improved its margins, reduced leverage, and actually has managed to reduce the share count, all contributing to these great earnings per share numbers.

Part of the share price momentum stems from a message in May, as the company posted its first quarter results. While they are quite solid, the company actually cut the adjusted earnings guidance by ten cents, with earnings now seen between $6.80 and $8.00 per share.

Net debt inched up quite dramatically to $3.4 billion, as this is a typical seasonably weaker quarter in terms of cash flows. With EBITDA trending at $1.4 billion, leverage ratios remains very much under control. The small adjustment to the earnings guidance is attributed to higher inflation, supply chain complexities and the impact of a strong dollar, as well as the closure of operations in Russia.

With a current $17 billion enterprise valuation, the company trades at just over 3 times sales and at a non-demanding multiple of around 14 times earnings here.

A Small Deal

In June, the company announced a small deal as FMC has expanded its biologics platform with an agreement to acquire BioPhero. The deal is set to add the so-called pheromone technology to its product line-up in an attempt to grow this specific segment to a billion in sales by 2030.

FMC is willing to pay $200 million for the Danish company, indicating that this is truly a bolt-on deal at a price just over 1% of its enterprise valuation, as unfortunately no revenue or margin details have been announced. Needless to say, I like the deal from a strategic point of view, as this is in reality the way forward for FMC, to perhaps drive multiple inflation over time as well, by becoming a better business.

Like What I See

While the near term outlook for FMC might have come down a bit, it still plays a major role as this is key in driving yields higher, in this high price environment. All of this is positive in the near term, with these benefits outweighed by inflationary pressures, among others. The other concern is of course the importance of ESG, yet this is exactly why I like the deal like BioPhero to transform the business over time.

While leverage has inched up a bit, this is still very manageable as FMC is very profitable and still solidly positioned, making current levels interesting to start initiating position here.