Shares of agricultural chemicals company FMC (FMC 5.89%) were down today, plunging 8.8% as of 2:33 p.m. ET.
While FMC had already warned investors earlier in the month that earnings were going to come in well below its estimates given earlier in the summer, it appears things were even worse than feared. Or, at least, investors were potentially hoping for a stronger outlook.
NYSE: FMC
Key Data Points
Industry-wide destocking of products
In the third quarter, FMC reported revenue of $981.9 million and adjusted non-GAAP (generally accepted accounting principles) earnings per share of $0.44. That marks a 29% revenue decline, as well as a 64% profit decline relative to the year-ago quarter. These figures were well below what FMC guided to back in August, but are essentially in-line with FMC's preannouncement made on Oct. 23.
As known before the earnings release, FMC is dealing with inventory destocking around the world, but especially in the agricultural center of Brazil. CEO Mark Douglas noted:
Our results were significantly below the prior year, driven by volume headwinds from a continuation of channel destocking behavior that began in the prior quarter. Destocking was much worse than anticipated in Brazil. Despite this, on-the-ground application remains steady as growers continue to protect their crops... Branded diamides and our new products outperformed the overall portfolio, which illustrates robustness for differentiated and higher-value products even in challenging environments.
On the note about product differentiation, management did note that despite the overall revenue and volume drop, the company's newer and differentiated premium products introduced over the past five years were actually up 4% year over year, and grew in all regions.
Another silver lining is that the fourth quarter is supposed to improve sequentially, with revenue only down 22% year over year at the midpoint and up sequentially to between $1.14 billion and $1.38 billion.
Destocking still expected to continue into next year
Unfortunately for FMC investors, the company expects the destocking activity to continue into next year. So while the company's P/E ratio of 9.2 looks very cheap, it may actually not be if earnings continue to fall on a year-over-year basis.
Right now, analyst estimates for 2024 still show growth over 2023. While earnings are definitely going to be depressed in the second half of the year, if high interest rates continue, those forecasts may prove optimistic. In addition, the company also has to deal with a not-insignificant debt load of over $4 billion, over $1 billion of which is maturing in the next year.
FMC soared last year as commodity prices spiked, fattening farmer incomes. Yet as is the case with any cyclical market such as agriculture, we are now seeing the other side of the "boom," with oversupply and destocking.
Investors should try to estimate a reasonable through-cycle EPS figure for companies like FMC, and then assign an appropriate multiple. Down 60% from all-time highs last year, FMC may be worth a look on a cyclical recovery -- however, that looks to be a little further off, potentially in mid-2024. Moreover, the company's debt load remains a key risk.
