FMC Corp Misplaced Pessimism Creates 50% Upside, For Starters

FMC Corp: Misplaced Pessimism Creates
50% Upside, For Starters
|Must Read Feb. 9, 2016 10:50 AM ET7 comments
by: Lester Goh
Summary
• Shares of FMC Corporation have been halved from their 2014 highs. While
there are some causes for concern regarding the company's fundamentals,
said concerns seem overblown.
• Weakness within the agricultural end-markets, GMO competition from larger
peers, significant currency depreciation, business model viability concerns,
accounting concerns, and a combination of technical factors likely
contributed to the sell-off.
• These issues have masked the multi-year transformation the company has
undertaken in order to transition to high-margin and differentiated franchises.
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• Margin expansion potential stemming from the Cheminova acquisition,
continued deleveraging of the balance sheet, "catch-up" pricing, and likely
take-out candidacy would close the price/value gap.
• ~50% upside for starters.
Thesis
In light of the recent market-wide sell-off due to global growth concerns, continued
cheap oil, among other issues, several quality companies have become attractively
priced. It is my belief that FMC Corporation (NYSE:FMC) ("FMC" or "the Company")
is one such candidate.
Reasons for the opportunity: weakness within agricultural end-markets, substantial
currency depreciation, GMO competition from larger peers, concerns over business
model viability, skepticism regarding substantial one-time charges, high leverage,
year-end tax-loss selling, and market-wide de-risking.
In my view, the aforementioned issues are either largely temporary in nature or
unfounded. Shares are attractive because at current prices, the market seems to be
under-appreciating the Company's portfolio transition into high-margin and
differentiated franchises and attributing little value to its Health & Nutrition and
Lithium segments, which should serve as free options on the upside. Additionally,
synergies from the Cheminova acquisition should provide decent margin expansion
potential. Couple that with a continued deleveraging of the balance sheet, "catch-
up" pricing, and the possibility of being acquired by a larger peer (such as
ChemChina), the opportunity seems fairly compelling.
Based on my base case (flat base FCFE + interest savings from deleveraging + run-
rate synergies), investors are paying ~12x 2018E FCFE for a near pure-play
agrochemical business whose cash flows are cyclically depressed due to the
downturn in its end-markets. Shares should trade at $56 -- assuming a target 5.5%
FCFE yield, which is in-line with comps -- representing ~50% upside potential
from current levels for starters.

Moreover, my base case does not take into account the following - the possibility of
a rebound in the ag end-markets and the potential for the realization of "catch-up"
pricing, where the former of which is hard to predict but sure to arrive. Given the
non-inclusion of these positives, there is significant margin of safety embedded in
going long FMC at current prices, in my view.
Finally, considering the recent pace of consolidation (Dow + DuPont, ChemChina +
Syngenta, etc) within the chemicals industry and the highly attractive franchises that
FMC owns, the likely endgame for FMC would be a take-out from a larger peer -
probably ChemChina. The potential for a take-out is of course, the cherry on top.
I believe that the probability of permanent capital impairment is limited (suffice to
say, temporary mark-to-market losses are almost always a given) considering that
the Company's substantial free cash flow generation would allow rapid deleveraging
and thus eliminating the possibility of a significant impairment of its business as a
result of its debt load.

Company Description
Since the beginning of the decade, the Company has embarked on a mission to
transform its portfolio by culling commoditized industrial businesses and acquiring
differentiated agrochemical franchises.
To date, FMC has divested five commoditized industrial businesses, with the latest
divestiture being its soda ash business. As a result, FMC is now nearly a pure-play
agrochemical company, with ~80% (from ~35% at the beginning of the decade) of
sales attributable to its agrochemical segment (pro forma for the Cheminova
acquisition), while its Health & Nutrition and Lithium segments comprise of the
remaining ~20% (H&N taking ~15% and Lithium ~5%).

In the context of global growth potential, agrochemicals are a GDP-growth business
while FMC's Health & Nutrition segment grows slightly faster than GDP in the mid-
to-high single digits and the Lithium segment is the fastest-growing, with growth
rates in the low double-digits.
FMC's current portfolio of businesses is characterized by industry-leading margins
(>20%+ EBIT margins) and low capital expenditures (~3% of sales) which translates
into strong free cash flow generation. These attractive economic characteristics are
protected by competitive advantages within each of FMC's individual segments.
In the agrochemical segment, FMC sells a large variety of crop protection
chemicals, including but not limited to, pesticides, herbicides, and insecticides.
These chemicals comprise of a de minimis portion of the end-user's (the farmer)
cost structure yet are the lifeblood of their business - crops inherently take many
months to grow, and a poor harvest would be hugely detrimental to the farmer.
FMC's agrochemicals help improve the farmer's harvest through increasing crop
yield and preventing disease, among other things.
As a result, farmers experience extremely high switching costs. Even if a better
product becomes available, inertia and the fact that switching to the alternative is in
most cases not economically sensible - farmers won't risk switching to save costs,
given that the cost of these chemicals are already such a small portion of their total
costs - defeats the cost-saving argument.
Within the Company's Health & Nutrition segment, FMC's profitability is protected by
high barriers to entry thanks to proprietary formulations (patent-protected or difficult
to manufacture) and the inherent need for customer technical support post-sale. The
difficulty in providing a product equivalent to FMC's and the fact that the Company's
technical staff has such a close proximity to end-users results in significant
customer lock-in.
As for the Lithium segment, a leading market position (#2 with ~20% market share
behind Albemarle who has approximately double the market share) and a significant
cost advantage form the basis of the segment's competitive advantage. FMC
produces lithium from brines in Argentina which enjoys ~50% cost advantage vis-à-
vis companies who produce lithium from hard rock. Being one of the low-cost
producers in a commodity market allows FMC to take market share from higher-cost
producers once they exit the market.

Currently, the Company's agrochemical segment is the most troubled, and hence it
will be a major focus of this note.
Although low crop prices, high channel inventories, and FX headwinds have
negatively affected operations, the market seems to have overreacted
Since 2014, prices of high-volume row crops such as sugar, wheat, rice, corn,
soybeans and cotton have dropped double-digits, with corn, soybeans and cotton
experiencing >25%+ fall in prices. This was mainly driven by better harvests leading
to a rise in crop inventory. As a result of lower prices, farmers cut back on planting
new crops, which leads to growing agrochemical inventories.
To add fuel to the fire, the Brazilian Real has also experienced significant
depreciation in recent years. Considering that the region (LatAm) is FMC's largest
ag market (historically accounting for nearly half of the Company's ag sales, now
accounts for closer to 40%), FX pressures have been particularly hard on FMC.
The adverse outcomes stemming from the combination of these factors is readily
apparent. YTD '15 (9-months) ag revenue pro forma for the Cheminova acquisition
have declined ~25%, driven largely by lower volumes and FX depreciation, though
slightly offset by higher prices. Due to modest operating leverage, operating profit
fell ~35%. Further, full-year 2015 Brazilian ag revenue is projected to fall by ~38%. It
is thus not surprising that bears tend to point to this poor performance to support
their thesis. However, the market appears to have overreacted to the Company's
results.
There are two points that needs to be addressed here which relates to FMC's
margins - price and volume.
With significant Brazilian Real depreciation (~40% over the past year), bears like to
point out that while the company has managed to slightly offset the currency
depreciation by raising prices, the magnitude of the price increase (~7% in 3Q,
consistent on a 9-month basis per the 10-Q) suggests that the company would not
be able to raise prices to regain lost ground. This is particularly important given that
a major pillar of the bull case depends on whether the Company would be able to
implement "catch-up" pricing initiatives in order to absorb currency depreciation.

Although this is a fair point, it does not hold up to scrutiny considering that the
depreciation in the Real was largely concentrated in H2 '15 - the USDBRL exchange
rate jumped from 3 to 4 during those few months. The growing/harvesting seasons
in Brazil dictates that working capital would accumulate for much of H1 '15 (the first
five months or so) and begin to release in the later months of the year. This is the
reason why DSO metrics in the ag space tend to be ~120-150 days.
Therefore, it is quite easy to ascertain the flaw in the bear argument with regards to
pricing. It was not that FMC could not increase prices in a major way to offset
currency depreciation. Instead, it was the mechanics of the ag working capital
cycle which prevented them from doing so.
As a result, the probability of the Company capturing ~$150m (management
estimates FX to have sliced off $250m in Brazilian revenue - which accounts for
~20% of the ~38% drop mentioned earlier - of which $100m has already been
regained due to pricing increases) in incremental Brazilian revenue as a result of
catch-up pricing initiatives is fairly high, in my view.
Would raising of prices negatively affect volume? I do not see this happening for
three reasons. 1) Crop protection chemicals comprise of such a small portion of the
end-user's cost structure and yet are essential to their processes makes it unlikely
that there would be any push-back. 2) After accounting for the sale of Consagro,
FMC's ag portfolio will consist mostly of high-margin products, which implies that
they experience lesser competition in these markets. Couple that with the
aforementioned high switching costs makes it difficult to envision a scenario where
FMC would not be able to pass through additional price increases. 3) FMC sells to a
fragmented customer base and thus it is unlikely that its customers would have
significant leverage over the Company.
It is important to note that although it is likely that FMC's ag segment could
experience further volume declines, these declines will largely a function of lower
demand due to high channel inventories / high crop inventory, not a result of inability
to pass through incremental price increases.
While it is true that high channel inventories have contributed to drastically lower
volumes (sales vol dropped ~40%), the fall in volumes is not as dire as it sounds
when put into context.

The decline in volumes can be mainly attributed to the high-volume, low-margin
products within the segment. Consistent with their apparent strategy of re-focusing
on differentiated, high-margin ag franchises, management has responded to
pressures stemming from Brazil by rationalizing its product offerings to eliminate
low-margin sales. The Company sold off its generics subsidiary, Consagro, which
would reduce Brazilian revenues by ~$250m.
Though the absolute amount of the reduced sales is fairly large, given that it does
not contribute much to profitability, it adds little value to the Company, in my view. In
addition, it signifies to investors that executives are far from empire-builders, but are
instead highly focused on shareholder value. There are not many management
teams who would willingly shrink their company, for example. The fact that FMC's
management team has opted to shrink the top-line through the sale of "empty-
calorie" revenues is a major plus in my book.
Per management, if one excludes portfolio rationalization efforts, the volume decline
is far more modest than the headline figure:

Following the acquisition of Cheminova, FMC initiated a
program to rationalize our global product offering and
increase our focus on proprietary technology platforms
and differentiated products. This portfolio rationalization,
which was accelerated during the third quarter, reduced
revenue in Brazil by approximately $120 million
compared to the third quarter of 2014. Excluding these
actions, sale volumes in Brazil declined only
modestly compared to the third quarter of 2014 as
demand in Brazil for FMC's differentiated products
remains strong. We saw continued volume growth in
FMC proprietary product offerings including sales of
insecticides for cotton, fungicides for soybean and
herbicides for sugarcane."
Source: 3Q 2015 Earnings Call Transcript
Essentially, management is implying that FMC's portfolio of differentiated, high-
margin products have only experienced a modest decrease in volume. The question
here is obvious: can we take management at its word? Given that the Company
does not exactly break out its low-margin/high-volume and high-margin/low-volume
products, it is hard to verify management comments.

Fortunately, it seems that there is a lot of truth in management's words. A close peer
of FMC, Platform Specialty Products, focuses on niche products within the
agrochemical space, much like FMC. Platform's results indeed corroborates the
above comments by FMC's management as Platform's ag results on an ex-currency
basis have remained fairly resilient.
In conclusion, it appears that the bear arguments regarding price and volume are
largely unfounded. With price/volume out of the way, the only other significant factor
that could affect FMC's margins would be raw material cost. This is a non-issue,
given that FMC sources its raw materials from many suppliers (hence no one
supplier can exercise leverage over FMC) and has no significant exposure to crude-
based materials (hence volatility in oil prices have little effect on FMC).
Could ag markets continue to worsen? Sure. However, the niche markets that FMC
focuses on (post-sale of Consgaro) are fairly insulated against downturns in the
broader ag markets - row crops could drop 30-40% and volumes for FMC would
only fall modestly, as detailed above.
GMO competition appears overblown
In my opinion, the one of the major points raised in bear arguments are the
presence of genetically-modified organisms ("GMOs"). For example, Monsanto
introduced Intacta soybean seeds in 2013 which has the ability to render insecticide
use redundant - or so the story goes. Moreover, considering that the introduction of
GMO crops have been largely concentrated on row crops which FMC has a large
exposure to (~60% of ag sales is derived from row crops), the entry of GMO
competition is particularly troubling. In spite of the above, GMO competition appears
overblown, in my view.
While insect-resistant GMO crops will reduce the need for insecticide use, it does
not make insecticide totally redundant. Although it does have some impact, the
effect remains largely muted. In addition, Intacta has been in the market for a few
years now with modest market penetration which suggests limited effectiveness.
This is not mere conjecture, it is confirmed by management:
FMC Corp: Misplaced Pessimism Creates 50% Upside, For Starters - FMC Corporatio… Page 10 of 22

Intacta has been in the market now - this is, I think, its
third year. Obviously, the acreage is growing. It does
impact the number of sprays for certain types of pests,
and yes, we along with others are impacted there. But we
have other products that take out the secondary pests.
For instance, our TALISMAN insecticide is very good on
stink bugs, which is a growing pest in soy area in Brazil.
So we expect to see increase in usage of those types of
products. So there are always pluses and minuses when
you see these new traits introduced."
In short, while GMO competition remains a threat, it cannot completely eliminate the
need for crop protection chemicals. Slow adoption not only suggests that GMO
crops are only effective to a small extent, it also highlights the hesitancy faced by
farmers given that seeds tend to comprise of a much greater portion of their cost
structure as compared to crop protection chemicals. Therefore, GMO competition
appears over-exaggerated, in my view.
Concerns over business model viability are unfounded
Another point that is raised by bears is that of business model viability. This is a fair
point, given that the model that FMC adopts is not really in-line with that of its larger
peers, which calls into the question whether FMC's is foolishly trying to reinvent the
wheel.
Players within the agriculture industry typically choose one of two paths. The first is
the path that companies such as Dow and Monsanto have taken. Such companies
tend to focus their energies on new product development, which requires massive

R&D budgets - it is not uncommon for these players to spend nearly a quarter billion
per new product introduction. Additionally, they also require huge manufacturing
facilities to support basic product manufacturing, which results in a capex-intensive
model.
The second is the path taken by FMC and its competitor Platform Specialty
Products. These companies tend to outsource basic product manufacturing and
procure active ingredients from tolling manufacturers in the emerging markets,
allowing them to operate an asset-light model due to the fact that they do not require
large manufacturing facilities. Moreover, their R&D budgets are also far smaller.
While some might view this as a negative, it is a positive, in my view.
Having a small budget allows these R&D teams to focus more on development
instead of research. Although research can have massive payoffs (much like new
drug discovery in the pharma/biotech industry), they are few and far between.
The R&D teams of FMC and Platform tend to focus on incremental active ingredient
improvement and smart combinations of patented and off-patent products within
their diverse portfolio and small niche markets where it is economically unwise for
larger competitors to enter. Therefore, R&D hit rates with such asset-light models
tend to be fairly high with symmetrical payoffs (in contrast to the R&D models of its
larger peers, which have low R&D hit rates but with highly asymmetric payoffs).
Time-to-market is greatly shortened as well, as evidenced by the fact that ~30% of
FMC's crop protection sales come from new products - this should eliminate any
concerns regarding business model viability considering that such a model is
inherently lower risk compared to the first model detailed above; no one new
product introduction makes or breaks the company.
Skepticism regarding substantial one-time charges are mostly baseless, thus
high leverage is not a concern
Another point that shorts like to make is that on GAAP numbers, the company
appears barely profitable. Given its debt-load, FMC is headed for considerable
financial stress if GAAP numbers are reflective of true economic reality. Pro forma
for the sale of the soda ash business, FMC is making roughly $100m in EBITDA on
revenue of over $2.3b for YTD 2015 - you don't need a calculator to know that these
numbers are a horrible return.

However, GAAP numbers are heavily distorted by a significant number of charges
which are one-time expenses, in my view. These one-time charges are largely the
result of the following - the M&A costs, hedging expenses, and purchase accounting
adjustments associated with the acquisition of Cheminova, and the sale of the
generics subsidiary, Consagro.
Given that these charges represent the majority of the gap (no pun intended)
between GAAP EBITDA and non-GAAP EBITDA, they will be our focus. On
adjusted non-GAAP numbers, company fundamentals appear solid. Therefore, the
central question to answer is as follows: are these substantial charges/add-backs
truly one-off? Keep in mind that these will be fairly rough numbers given that we will
be comparing YTD 2015 numbers with projected full-years numbers; we will need to
roughly estimate the 4Q numbers.
Total acquisition-related charges associated with the Cheminova acquisition
amounted to $274m YTD '15, and should conservatively end up being ~$350m for
full-year. These charges comprise of ~$50m in legal/professional fees, ~$50m in
inventory fair value amortization, and ~$172m in hedging expenses.
Legal/professional fees are the result of the hiring of lawyers/bankers, costs for
transitional employees (relocation and so on) and third-party professional fees. In
other words, they only occur when a transaction is being completed and are thus
inherently one-off. Moreover, FMC acquired Epax assets in 2014, incurring ~$15m
in such fees, which did not recur in later quarters, further suggesting that these fees
are will be absent in future quarters.
Inventory fair value amortization are the result of purchase accounting adjustments
that need to be done when an acquirer acquires another company. Basically, these
are GAAP fiction. An example is as follows: FMC acquires a company that pays $10
per unit of inventory. If FMC could sell this inventory for $40 (which it can, that's how
it makes a profit), accounting principles require the inventory to be held at fair value,
which would result in a mark-up of the inventory cost to say, $30. This adjustment
would result in a $20 non-cash charge to earnings, which to a business owner, is
totally irrelevant - they paid $10 per unit of inventory, not $30. Hence, add-backs
inventory fair value amortization charges are justified in FMC's case.

Hedging expenses were the result of a hedging transaction that FMC entered into in
order to insulate itself from currency fluctuations with respect to the purchase price
of Cheminova. At the time of the transaction, the Company entered into a series of
FX forwards which allowed them to fix the purchase price at $1.47b. Due to USD
strengthening ~20%, the Company incurred a mark-to-market loss of ~$172m on
these contracts. Importantly, this is a mark-to-market loss - it is unrealized / there
was no cash outflow. Suffice to say, this add-back is justified - the Cheminova
transaction has already closed; this charge will thus no longer recur.
In September 2015, FMC sold Consagro to the Brazilian subsidiary of Albaugh. Due
to GAAP which requires assets held for sale to be reported at the lower of carrying
or fair value, the company incurred a ~$40m charge to adjust the carrying value of
said assets. Once again, this is merely an accounting adjustment with no cash
impact, and given that this transaction would only occur once (you can't sell an
operating unit twice), there is no chance that this charge reappears in future
quarters.
In short, given that the substantial majority of the add-backs are justified, I have a
great deal of confidence in management's full-year 2015 non-GAAP op cash flow
(defined as EBITDA adjusted for working capital changes) of $725m-$760m. After
accounting for pensions, tax, interest ($215m in total at the mid-point), and capital
expenditures (~$138m at the mid-point), free cash flow to equity comes out to
around roughly $390m at the mid-point. Given ~$1.9b in net debt and around $630m
in implied EBITDA (management commented in the 3Q call that net debt to EBITDA
was slightly above 3x), concerns of high leverage appear baseless.
2018E free cash to equity estimate suggests ~50% upside, for starters

Source: Company estimates, author's estimates
Key assumptions are as follows: base FCFE of $390m remains flat through 2018,
synergies are realized on schedule, debt is repaid using base FCFE + savings from
synergies, average debt interest rate of 6%, 10% discount rate, 133m shares
outstanding, and a 5.5% target FCFE yield.

It is not hard to ascertain that my assumptions are highly conservative - flat FCFE
assumes no improvement in ag end-markets through 2018 (while end-markets
might deteriorate further, FMC is likely to be fairly insulated against this given its
niche focus, as detailed earlier), which would be an anomaly given that ag cycles
take 2-3 years to turn (we are in the 2nd year), synergies are exclusively cost
synergies thus have risks to the upside if revenue synergies are realized in any
significant way - management have high hopes for revenue synergies but are not
including it in their synergy estimates for the sake of conservatism, 5.5% FCFE yield
is in-line with comps, and finally FMC's current valuation of 12x FCFE suggests that
the market is valuing the company similar to commodity chemical producers such as
Tronox, not the specialty chemicals player that it is.
With such conservative assumptions, FMC has the potential for ~50% from
current levels - implying a $56 share price, in my view.
Importantly, we must note that my estimates take into account neither the possibility
of a recovery in the ag markets nor the potential for "catch-up" pricing (the entirety of
which would fall to the bottom line), suggesting that there is significant margin of
safety embedded in my estimates and that true upside potential could be far greater.
Free options on Health & Nutrition and Lithium segments plus take-out
potential
Given that the market is essentially unfairly valuing FMC as a commodity chemicals
producer, this suggests that it is ascribing little value, if any, to the Company's
Health & Nutrition and Lithium segments, both of which are growing faster than the
ag segment.
Since the beginning of the decade, FMC has entered into a number of new product
lines within H&N such as natural colors, a nearly billion-dollar market (~$800m)
growing in the low double-digits. This growth is driven by the conversion from
synthetic to natural colors in food due to shifting consumer preferences. FMC has
also since acquired two smaller businesses (BioColor and Phytone) in this area to
complement its H&N franchise. Other growth possibilities include pectin, a texturant
with low pH applications with a similar market size as natural colors growing in the
high single-digits, and the pharma-grade omega-3 market which the Company
expects to grow at a mid-teens rate once FDA approvals have been sussed out.

As mentioned in earlier paragraphs, FMC holds the number two spot in Lithium with
20% market share and possesses a 50% cost advantage vis-à-vis peers who
extract lithium from hard rock. Lithium is expected to grow at low double-digits,
thanks to increased lithium ion battery demand from several large end-markets
(transport, electronics, and power). Transport demand obviously stems from the
shift to electric vehicles, electronics demand is derived from tablets and
smartphones being powered by lithium ion batteries, while power demand is a result
of growth in grid power storage solutions.
While these segments are currently a small proportion of FMC's consolidated sales
(~20%), the fact that they are growing much faster than the ag segment suggests
that these segments could account for a much larger proportion of FMC in future
years. As the market seems to be ascribing little value to H&N and Lithium, they
serve free options on the upside, in my view.
Another free option stems from the possibility of FMC being a take-out candidate in
the coming years. To those who are familiar with the chemicals universe, the pace
of industry consolidation has been rapidly increasing as evident by the recent
ChemChina/Syngenta and Dow/DuPont deals. Per FMC's management, it seems
that nearly every major player is interested in acquiring or merging with another
player:

Well, there is no questions that there is lots of talk which
are going on in the industry, which will most likely lead to
some sort of consolidation. I think everybody is talking to
everybody and everybody is watching what everybody
else is doing. So right now it's like playing chess,
everybody is making a move and waiting. Lots of
discussion are taking place. How this is going to unfold? I
don't think many people know it. I don't even know if
anybody know, but certainly there is discussion which will
lead to some consolidation."
In my view, ChemChina would be the most likely acquirer of FMC. Syngenta has
agreed to be acquired by ChemChina for $43b. ChemChina stated that its rationale
for the acquisition is to ensure that China would be able to secure a sustainable
food supply for its growing population. FMC has certain fairly striking similarities to
Syngenta that could make it an attractive candidate for ChemChina.
Syngenta's portfolio has a large concentration to row crops, similar to that of FMC.
FMC's focus on more niche-y markets could serve as a supplement to Syngenta's
broad-market appeal and would result in a more complete breadth and depth of
product offerings (Syngenta focuses a lot on seeds, FMC a lot on protecting those
seeds).
Moreover, the two companies would fit culturally as well. When Syngenta agreed to
be acquired by ChemChina, a major factor in the decision was that ChemChina
would leave Syngenta's headquarters and management alone post-deal. In other
words, operations would be fairly decentralized. In the context of FMC,

decentralization seems to be a significant focus for the Company, given that
corporate costs are a mere $20m on $2.3b of revenue, suggesting that decision-
making is being pushed down to operators in the field instead of needing to be
approved by HQ.
In addition, once ChemChina consummates the acquisition of Syngenta, it is likely
that the Chinese chemicals company would be forbidden from making further
similarly-sized mega-deals given the potential for antitrust issues. FMC's small size
relative to Syngenta and ChemChina would make antitrust concerns a non-issue.
Furthermore, FMC's relatively small market capitalization would make deal financing
a breeze as ChemChina could very comfortably fund the acquisition using internal
cash flow.
For the above reasons, FMC is a highly attractive candidate for ChemChina, in my
view. When would the transaction occur? Given the apparent shareholder-
friendliness of FMC's management, I doubt that a transaction would occur in 2016.
My reasoning is fairly simple - a 2016 acquisition would mean that FMC would be
acquired during a ag down-cycle, implying that it would be acquired at a distressed
valuation. Considering FMC's management focus on shareholder value, it strikes me
as highly likely that the Company would wait for a recovery in the ag markets to
achieve a much fuller valuation. ChemChina would probably also need a couple of
years to digest the Syngenta acquisition. In any case, the likely acquisition price
would be far greater than $56 share price estimate as it would be made in a
stronger ag market, in my view.
Catalysts
• Upturn in the ag cycle - the ag downcycle usually last 2-3 years (according to
data from 1994-present), and we are about two years into that downcycle. As ag
markets begin their recovery, not only would investor sentiment do a 180, FMC
would be able to return to mid-to-high single-digit growth in its ag segment.
• Synergy capture - Management estimates $150m in synergies to be realized
through 2018 at the mid-point. With current EBITDA at ~$630m, synergy capture
represents a significant opportunity for earnings growth. Further, the synergy

estimate comprises exclusively of cost synergies, thus there are risks to the
upside if a material amount of revenue synergies are realized from the
Cheminova acquisition.
• Realization of "catch-up" pricing initiatives - the Company still has a potential
$150m opportunity to fully offset recent currency depreciation. However, the
timing on these initiatives is uncertain given that the relatively long sales cycle
(120-150 DSO is common in ag) requires currencies to stabilize before it can be
put into effect. Fortunately, the Real seems have to stabilized through 4Q '15
and into early 1Q '16.
Risks
• Protracted down-cycle for the ag market - while this is always possible, FMC is
mostly mitigated from these issues given its focus on market niches which do
not fluctuate as much as the broader ag market.
• Further EBITDA downside threatening covenant violation - the Company's credit
agreement calls for maximum net debt/EBITDA of 4.5x. Currently, the ratio is
slightly above 3x per management's 3Q commentary, but could worsen.
However, this worsening is mitigated by the fact that FMC has multiple levers
(synergy capture + "catch-up" pricing initiatives + deleveraging) that are within
their control they can pull to prevent such a scenario.
Conclusion
FMC has been troubled by a variety of factors that are temporary in nature, in my
view. End-market weakness, currency depreciation, GMO competition, and
concerns over its business model and accounting have weighed on its shares, but
these factors are largely transitory or unfounded and have disguised the Company's
transformation into a differentiated, high-margin business with promising franchises
in agriculture, health & nutrition, and lithium.
Catalysts include a recovery of the ag end-market, synergy capture, rapid
deleveraging, and realization of "catch-up" pricing initiatives. Risks include a
protracted down-cycle for the ag market and further EBITDA downside threatening
covenant violation.

My base case calls for shares to trade at $56 - based on a target 5.5% FCFE yield,
which is in-line with specialty comps - suggesting ~50% upside potential for starters.
Importantly, my base case does not factor the possibility of a recovery in the ag
markets or the positive benefits from "catch-up" pricing initiatives, making it
extremely conservative, in my opinion. As a result, the opportunity for FMC seems
fairly compelling, in my view.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate
any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it (other than from Seeking Alpha). I have no business relationship
with any company whose stock is mentioned in this article.
Additional disclosure: The author's reports contain factual statements and
opinions. He derives factual statements from sources which he believes are
accurate, but neither they nor the author represent that the facts presented are
accurate or complete. Opinions are those of the the author and are subject to
change without notice. His reports are for informational purposes only and do not
offer securities or solicit the offer of securities of any company. Mr. Goh ("Lester")
accepts no liability whatsoever for any direct or consequential loss or damage
arising from any use of his reports or their content. Lester advises readers to
conduct their own due diligence before investing in any companies covered by him.
He does not know of each individual's investment objectives, risk appetite, and time
horizon. His reports do not constitute as investment advice and are meant for
general public consumption. Past performance is not indicative of future
performance.

FMC Corp Misplaced Pessimism Creates 50% Upside, For Starters

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