FMC CORP. (INTERNATIONAL VALUE, INTERNATIONAL VALUE II, AND VALUE FUNDS)
FMC Corp. (FMC, Financial) provides crop chemicals for the agriculture industry. Crop chemicals protect farmers’ fields from insects, fungus, and weeds, which allows them to increase their crop yields. As a result, farmers are more than willing to pay a price premium for effective products. Similar to pharmaceutical companies, crop protection products also are often “patented,” which gives them pricing power. In addition, the development time and investment, combined with navigating the regulatory process in a variety of jurisdictions, and then achieving distribution at scale, provide immense barriers to entry in the industry. Small companies may be able to conduct research on active ingredients, but it will be difficult for them to “commercialize” them. Given all of this, FMC has enjoyed a high return on capital and has been a very profitable business, earning a 27% EBITDA margin and a 25% ROE including goodwill for the year 2020.
FMC is diversified geographically and by crop, which should serve to make it a less cyclical business. It also has, in our view, a very good new product pipeline, and aims to grow its revenues at 5% to 7% annually through 2023, and its EBITDA at 7% to 9% annually through 2023. The company also has had some insider purchases recently from both its CEO and CFO.
While FMC could face some ESG risk associated with increasing regulations that ban certain crop chemical products due to their environmental impact, we do not think it is likely that this risk will be material. To date, FMC has actually benefited from this dynamic. Many older crop chemicals, particularly certain insecticides, are “broad-spectrum,” and can be quite toxic to the environment because they impact everything that they come into contact with. As a result, regulators are increasingly prohibiting the use of the older, more harmful chemistries. In contrast, FMC produces a lot of “targeted” crop chemicals, which affect only the “targeted” pests, and therefore have a lower environmental impact. This has allowed these products to take market share from the older, more toxic ones that are being banned, allowing FMC to grow at nearly twice the industry growth rate. In this respect, rather than negatively influence our valuations, environmental impact concerns actually caused us to increase the multiples we used to estimate the company’s intrinsic value.
We valued FMC between 13 times and 14 times EV to EBITDA, although there have been a number of recent comparable industry acquisitions at multiples in the mid-to-high teens. At purchase, it was trading at roughly 10.5 times its 2022 estimated EBITDA, and at a relatively low price earnings multiple (12.2x 2022 estimated EPS) in part due to its low tax rate. It also had an “owner earnings” yield (net operating profit after tax/enterprise value) of approximately 7.6%.