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Morningstar | FMC Continues to Execute DuPont Crop Chemical Portfolio Integration; We Raise FVE to $81. See Updated Analyst Note from 02 Aug 2018

FMC reported solid second-quarter results as the company grew profits in both the agricultural solutions and lithium businesses. As FMC continues to integrate the acquired DuPont crop chemical portfolio, we maintain our outlook that the company will generate agricultural solutions segment adjusted EBITDA margins in the high-20% range and lithium segment adjusted EBITDA margins in the mid-40% range for 2018. Having updated our model to incorporate second-quarter results, we raise our fair value estimate to $81 per share from $80 largely due to the time value of money effects. Our narrow moat rating remains intact.

In the agricultural solutions segment, revenue grew 8% year on year on a pro forma basis when adding the acquired DuPont portfolio to 2017. Much of the increase was driven by a 24% growth in the acquired Rynaxypyr and Cyazypyr crop chemical products, which generate roughly a third of total segment sales. As these patented products generate higher margins, we expect FMC to continue to generate adjusted EBITDA margins in the high-20% to low-30% range until 2022, when Rynaxypyr comes off patent. We continue to expect crop chemicals application in North America to be slightly down in 2018 due to the late start to the planting season. However, the solid growth in FMC's two major crop chemical formulations should more than offset a decline in its other products.

The lithium business continued to perform well as higher volumes and prices drove 82% year on year growth in adjusted EBITDA to $51 million during the quarter. FMC plans to spin off the lithium business, which will be named Livent Corporation, by the end of 2018.

On the earnings call, management noted that FMC's contracted lithium prices increased sequentially during the second quarter of 2018. This is in line with our view that contracted lithium prices will remain strong throughout 2018. Although lithium carbonate spot prices in China have fallen from over $25,000 per metric ton in late 2017 to slightly above $15,000 in early August, we emphasize that the lithium spot price in China applies to very little of total volumes in China. FMC sells nearly all of its lithium on contracted prices and as such, the company's results will be minimally impacted by Chinese lithium carbonate spot price movements.