A 5-Star Dividend Stock to Buy With a 3.7% Yield

Inventory destocking across the globe has crippled the results of crop chemical producer FMC FMC; the shares are down more than 50% over the past 12 months. Yet we’re bullish on this undervalued stock for the long term. We expect destocking to end in 2024 and think that the narrow-moat company’s strong research and development pipeline will more than offset generic competition as its diamide molecules go off patent. FMC stock looks deeply undervalued, trading at half of what we think it’s worth. This dividend stock is on our analysts’ list of top 33 undervalued stocks this quarter; it’s also one of Morningstar chief US market strategist Dave Sekera’s 5 Dirt-Cheap Stocks to Buy in April.

FMC is a pure-play crop chemical producer and one of the five largest patented crop protection companies in the world. Its largest products—the diamides, which generated 39% of sales in 2023—are set to see patents expire and face increased competition from generic products in the coming years. However, a pipeline of new premium products should allow FMC to continue producing new crop chemicals as older products roll off patent. The company has a strong pipeline of synthetic and biological products that should more than replace lost diamide profits. FMC’s product portfolio currently skews toward insecticides, which generate over half of revenue, but many of its new products in the pipeline are herbicides and fungicides, which should result in a more balanced portfolio among the three primary types of crop protection chemicals as new products are commercialized over the next decade.

Key Morningstar Metrics for FMC

• Fair Value Estimate: $110
• Star Rating: 5 Stars
• Economic Moat Rating: Narrow
• Uncertainty Rating: High

Economic Moat Rating

Our narrow economic moat rating is based on intangible assets, as FMC’s patented crop protection products provide the company with pricing power. Crop chemical companies realize premium prices on their patented products, generating returns in excess of the cost of capital. It typically takes 5-10 years to bring new products to market. In addition to years of research and development, these chemicals require regulatory approvals as they are tested for consumer, environmental, and worker safety. Approved patents have protection that lasts for 20 years from the research phase on the active ingredient, which is known as the molecule. Crop chemical companies take additional steps to extend a successful product’s patent life by up to five years by patenting the product formula and specific manufacturing processes. We expect demand for FMC’s new products will allow the company to continue to safely outearn its cost of capital over at least the next decade.

Read more about FMC’s moat rating.

Fair Value Estimate for FMC Stock

Our fair value estimate assumes roughly an 8.5% weighted average cost of capital. We forecast EBITDA will grow at a low- to mid-single-digit average annual rate over the next 10 years, which reflects FMC’s pricing power from the development of new patented products. We FMC to stabilize its business in 2024 as the inventory destocking that began in 2023 ends by mid-2024. Despite a drought in Brazil, which is FMC’s largest market, we expect revenue growth in 2024, with adjusted EBITDA being just above 2023 levels. Longer term, we expect FMC’s sales volume to be pressured by increased generic competition in its diamide products. However, we forecast FMC’s strong pipeline will generate $3.5 billion of sales by 2030, rendering the diamides less important to overall growth and profits over time. We forecast adjusted EBITDA margin will recover to the mid-20s by 2025.

Read more about FMC’s fair value estimate.

Risk and Uncertainty

The largest risk for FMC is its ability to maintain its premium prices as patents expire, which can affect companywide revenue growth and profitability. We think the company has a solid R&D pipeline, but there is no guarantee that these investments will bear fruit. FMC faces factors outside its control, such as declining crop prices and farmer incomes, which would lead to lower crop chemical demand. Industry growth could also be hurt by the increased adoption of insect-resistant genetically modified seeds in emerging markets. Unfavorable weather conditions can hurt demand in a region in any given year. The crop chemical industry is highly competitive and also subject to potential regulations.

Read more about FMC’s risk and uncertainty.

FMC Bulls Say

• FMC has transformed its portfolio to focus on crop chemicals, which have strong growth prospects as yield gains are needed to support rising food consumption from emerging markets.
• A focus on developing new biologicals will prove value-accretive as biological crop protection products take market share from synthetic crop chemicals.
• FMC’s pipeline should allow the company to continue expanding profits as the patents for its two largest molecules expire.

FMC Bears Say

• FMC’s patents have begun to expire for its two largest molecules. This will weigh on long-term profits as the company faces declining sales and margin compression from the patent expirations.
• The crop chemical market is competitive, with many products vying for share. Industry players require consistently high spending on R&D to maintain a pipeline of new products.
• As a crop chemical producer, FMC is exposed to decreased insecticide demand resulting from greater adoption of insect-resistant, genetically modified crops.

This article was compiled by Susan Dziubinski and Sylvia Hauser.