EUR 850.00 For Business Accounts Only

Morningstar | Raising Our FMC FVE to $79 on Higher Near-Term Profit Outlook; Shares Fairly Valued

FMC reported solid first-quarter earnings as adjusted EBITDA rose 4% year on year to $343 million, excluding divestitures, as higher prices and volume were only partially offset by higher costs and foreign exchange headwinds. In its earnings release, management raised its 2019 adjusted earnings per share guidance to $5.62-$5.82 from $5.55-$5.75. We've updated our valuation model to incorporate our outlook for higher near-term profit growth. Combined with time value of money effects since our last update, this leads us to raise our fair value estimate to $79 per share from $76. Our narrow moat rating is unchanged. At current prices, we view FMC as fairly valued with shares trading near our fair value estimate.

During the earnings call, management cited midteens growth for the crop chemicals acquired from DuPont, with much of the growth due to the diamides (Rynaxypyr and Cyazypyr). We expect these products to drive sales growth over the next few years. However, Rynaxypyr, which is expected to generate over $1 billion in peak sales, will begin to go off patent in 2022. Although the entire patent expiration will take a few years, we expect FMC to begin to see operating margin compression in 2023 and beyond as the patent expiration weighs on pricing.

Although we forecast that margins will again start to contract in 2023, the decline will be partially offset by FMC's new product launches. On the earnings call, management said its new fungicide, Lucento, has now been launched. Over the next decade, FMC plans to launch five additional products. These six new products should have combined peak sales of $1.5 billion, versus $2.0 billion in peak sales for the diamides. As a result, we forecast operating margins to come in at a 21% midcycle level, above the 19% achieved in 2018.