FMC: Lower Volumes Will Weigh on 2023 Profits, but Stock Selloff Is Unjustified

We trim our FMC FMC fair value estimate to $135 per share from $140 after updating our model to incorporate the company’s reduced 2023 guidance. Our narrow moat rating is unchanged.

FMC shares were down nearly 8% at the time of writing as management reduced its revenue and adjusted EBITDA guidance for the year by 14% and 12%, respectively, due to lower volumes, partially offset by lower unit production costs. While the lower volumes will affect profits in the near term, we see little impact on FMC’s long-term outlook. As the company commercializes its research and development pipeline of premium crop protection products, this should drive average annual profit growth of 5% over the long term.

Accordingly, we view the selloff as a good opportunity for long-term investors to pick up shares of the quality crop protection producer with the stock trading nearly 30% below our updated fair value estimate. The current price also offers a solid margin of safety in the stock. Shares trade at a little more than 10% above our downside scenario, which produces a fair value estimate of $85 per share. In our downside scenario, we assume 1% annual profit growth as FMC’s new products largely replace its existing portfolio, leading to slower growth versus our base case.

Given that crop prices have fallen in 2023, we think FMC’s nonpremium products are the most likely to be affected. In our view, farmers will still generally pay up for premium crop protection products that fight weeds, insects, and fungi that are resistant to traditional crop protection products as a way to preserve yields, even when crop prices are falling. However, in a lower-price environment, farmers are more likely to cut back on the use of additional generic products, such as reducing the number of times they apply a product to their field, resulting in lower volumes for producers such as FMC.