FMC Corporation: A Takeover Is A Matter Of When, Not If

| About: FMC Corporation (FMC)

Summary

Global agricultural chemical and seed markets remain weak and depressed, and, as such, competitors in such markets are looking to mergers and acquisitions for growth.

The consolidation in the agricultural industry is likely to continue as weak economies and decreased research spending is leading companies to seek non-organic growth through mergers and acquisitions.

FMC, which is increasingly focused on higher-margin businesses, will benefit from favorable long-term growth trends in agriculture, lithium use, and an aging human population.

The company is a takeover target given trends favoring its businesses, recent acquisition benefits, its need to compete against larger competitors, and a likely rebound in agricultural commodity prices.

We believe investors should follow insiders, who purchased $4.5 million of the company’s shares, to collect a 1.5 percent dividend until a competitor acquires this transforming company.

With the recent news that Germany's Bayer A.G. (OTCPK:BAYRY) is deciding whether to make an attempt to acquire Monsanto (NYSE:MON), it is clear that the global agricultural chemical and seed markets remain depressed, and, as such, companies in such markets are looking to mergers and acquisitions for growth. It was not long ago that MON itself attempted to acquire Syngenta (NYSE:SYT) in a tax-inversion deal, but SYT rebuffed MON's multiple offers. Then, however, SYT agreed to sell itself to ChemChina for over $40 billion. Further, in late 2015 Dow Chemical (NYSE:DOW) and Dupont (NYSE:DD) announced its merger of equals whereby it would then split into three companies, one of which would comprise DOW and DD's substantial agricultural businesses into one company. Commentators have noted that this series of mergers and acquisitions in the agricultural chemical and seed industry is likely to continue as a weak global economy and decreased spending on research and development is leading agricultural chemical and seed companies to seek non-organic growth through mergers and acquisitions rather than organic growth through innovation.

With this introduction to the recent agricultural chemical and seed industry mergers and acquisitions in mind, we believe that FMC Corporation (NYSE:FMC), a company whose products include agricultural pesticides, biopolymers, nutritional products and Lithium, is a company that will likely be acquired within the next three to five years. FMC is a company that has been transforming while also facing strongly depressed market conditions such as adverse currency effects and weak agricultural commodity prices that its above-identified competitors face as well. (We should note this is not the first time we have posed the idea of FMC as an acquisition target.) Over the past year, the company repeatedly reduced its earnings estimates to account for weak commodity prices and adverse currency conditions (especially in Brazil). The company's agricultural solutions division in particular continued to face difficult market conditions. Depressed agricultural commodity prices, elevated channel inventories and a decrease in adverse insect conditions weakened demand for the company's crop-protection products. In addition, global crop-protection markets experienced a significant decrease due to a considerable decrease in demand in Brazil as the country faces a deep economic crisis and political upheaval.

Although FMC, along with its merging competitors, will continue to face deeply adverse market conditions in the near term, over the long term, the company's businesses are exposed to larger, favorable secular growth trends in agriculture; lithium (used in electronic vehicles); and an aging population that favors FMC's health and nutrition products. In addition, FMC's strategic acquisition of the crop-protection products maker Cheminova A/S for $1.8 billion will boost the company's results over the intermediate and long term. The Cheminova purchase is an important addition to FMC given that Cheminova has a complementary product portfolio and technologies and given that such acquisition was a major step in FMC's move away from lower growth commodity businesses and toward higher growth businesses. FMC is progressing with its integration of Cheminova and expects to realize synergies of at least $120 million before 2017. As noted above, although the company faces near-term adverse conditions, we believe it is an intermediate-term acquisition target for four reasons: 1) the above-noted long-term trends that favor the company's businesses; 2) the ongoing strategic benefits that may be achieved from the company's Cheminova acquisition; 3) the ongoing mergers and acquisitions in the agricultural chemical and seed industry prevent the much smaller FMC from competing effectively against much larger competitors; 4) a likely rebound in agricultural commodity prices due to global population growth and a recovery from turmoil in the major agricultural market in Brazil. A bonus for any company acquiring FMC is its Lithium business, which is red hot at the moment given that Lithium is a necessary component of rechargeable batteries, used in consumer devices like mobile phones and electric cars. The Lithium business could be sold to pay in part for an acquisition of FMC. We believe that investors should consider FMC's shares on any overall market weakness given the long-term trends that favor the company's businesses and the intermediate agricultural industry trends that favor the acquisition of the company. In the near term, investors may collect an almost 1.5 percent dividend until the company's markets recover or until a larger competitor acquires it.

First Quarter 2016 Earnings

In early May 2016, FMC announced earnings of 36 cents a share ($48.3 million profit), an increase from a loss of 35 cents ($46.8 million loss) from the year-ago quarter. Excluding one-time items and including restructuring charges, earnings would have been 58 cents per share. The company's overall revenues increased 21 percent from the year-ago quarter to $798.8 million due to a strong increase in sales in its agricultural solutions division. Revenues from the company's agricultural solutions division increased 39 percent from the year-ago quarter to $546 million, while profits for the division were $82 million, flat from the year-ago quarter due to higher pricing offset by adverse currency effects. Revenues from the company's health and nutrition division decreased 9 percent from the year-ago quarter to $192 million due to decreased Omega-3 sales and adverse currency effects, while profits from the division decreased 7 percent from the year-ago quarter to $47 million due to lower sales. Revenues from the company's Lithium division increased 8 percent to $60 million, a strong increase from $14.9 million in the year-ago quarter due to cost savings projects, reduced raw material costs and higher prices.

FMC raised its adjusted earnings estimates for 2016 to a range of $2.55 to $2.85 per share, an increase from prior estimates of $2.50 to $2.80 per share. The company expects revenues for its agricultural solutions division to be about $2.3 billion to $2.5 billion for 2016 with earnings for the division to be in a range of $380 million to $420 million. The company expects revenues for health and nutrition division to be in the range of $775 million to $825 million for 2016 with earnings for the division to be in the range of $198 million and $208 million. The company expects earnings for 2016 for the Lithium division to be in the range of $43 million to $53 million for 2016 (an increase from earlier estimates of $33 million to $43 million expected earlier).

Our View

There is no doubt in our mind that a larger competitor will acquire FMC in the intermediate term for the reasons noted above. The markets that the company's divisions sell into remain attractive despite near-term adverse conditions. The company's agricultural division sells into a market facing favorable long-term trends, such as the need to feed a growing population and increased protein consumption by an expanding middle class. The company's lithium division, the only division excelling at the moment, will likely continue to benefit given that about a third of such business is lithium used for energy storage, a market that could experience rapid growth as electric car makers use lithium-ion batteries to power their cars. Further, as we have noted in an earlier article, the company has been transforming towards higher-margin businesses recently. We should also note a fact that should not be overlooked in boosting the odds that a larger competitor will acquire FMC in the intermediate term. The current president of FMC is a former top executive at Rohm & Haas, which sold itself to DOW several years ago. We believe the current president of FMC will favor the sale of the company as well. We also believe that investors should consider FMC's shares given the large and coordinated insider purchases of the company's shares in the latter part of 2015. In August 2015, the company issued a press release announcing $4.5 million in insider share purchases in the $40 to $41 range to underline its belief that the market was undervaluing the company's shares and long-term business prospects. The CEO alone purchased $2 million in FMC shares.

FMC's forward price to earnings ratio is about 17.20 based on the 2016 earnings estimate of $2.67 and is about 15.00 based on 2017 earnings estimates of $3.07. Earnings estimates for 2016 and 2017 have been revised downward over the last year, but were revised upward slightly at the latest earnings announcement. While prospective FMC shareholders should not discount the adverse agricultural market conditions, commodity pricing pressures and adverse currency effects that the company currently faces, they should also recognize that such adverse conditions are typically cyclical in nature and will resolve themselves over the intermediate and long term. FMC is facing near-term adverse agricultural and currency market conditions, but is also in transformation; hence, investors should give the company's shares a higher valuation, as such transformation begins to show results. Finally, consolidation in the agricultural industry and long-term global market trends that favor FMC's businesses, support the idea of a larger competitor acquiring it in the intermediate term before the agricultural markets turn upward. We believe that potential investors should strongly consider the company's shares during an overall market sell-off and collect the near 1.5 percent dividend until an acquisition occurs. (Click "follow" next to our contributor name at the top of this article to follow our upcoming articles on FMC and more.)

Disclosure: I am/we are long FMC, DOW, DD, MON.

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.