Morningstar | Reducing FMC Uncertainty Rating Due to Reduced Downside Risk of Patent Losses; Raising FVE to $91. See Updated Analyst Note from 05 Dec 2018
Our key takeaway from FMC's recent investor day was the strength of FMC's crop chemicals pipeline. Through the day, management discussed the upcoming crop chemical product launches that will occur over the next decade and CEO Pierre Brondeau highlighted the company's commitment to investing at least 7% of sales annually into research and development. While we still think FMC will see some margin contraction when the Rynaxypyr patents begin to expire in 2022, we have updated our forecast to include more new product launches. We slightly increase our fair value estimate for narrow-moat FMC to $91 per share from $90. At current prices, shares look modestly undervalued.Additionally, having reassessed the impact of Rynaxypyr and Cyazypyr going off patent in the next decade, we think FMC's solid pipeline will partially offset the margin decline from the patent losses. Accordingly, we lower our uncertainty rating for FMC to high from very high as we have increased our bear-case fair value estimate to $56 per share from $50.
Over the next decade, FMC plans to launch at least six new patent protected products, all herbicides or fungicides. We think FMC is smart to focus on these products for two reasons. First, as bugs, fungi, and insects around the world become increasingly resistant to traditional crop chemicals, demand for more powerful products will increase. This should allow FMC to grow sales of its new products at a more rapid pace. Second, for the new herbicide and fungicide products, there is less risk that demand for these crop chemicals will decline due to increased GMO seed penetration, which has negatively impacted insecticide demand.
FMC is an agricultural sciences company. The company provides solutions to growers around the world with a product portfolio fueled by a discovery and development pipeline in crop protection, plant health, and personnel pest and turf management. This combination of technologies includes insect control products based on Rynaxypyr? and Cyazypyr? active ingredients; Authority?, Boral?, Centium?, Command? and Gamit? branded herbicides; Talstar? and Hero? insecticides; and flutriafol-based fungicides. The company's products are used in agriculture to improve crop yield and quality by controlling a range of insects, weeds and disease, as well as in non-agricultural markets for pest control.
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