Evidence is mounting to support a bullish outlook for the agricultural sector. A closer look reveals that shares of FMC Co. (NYSE: FMC) could become one of the most attractive options within the primary industries supporting the new wave of agricultural demand. After reporting its first quarter 2024 earnings results, shares of FMC closed the trading session nearly 10% higher. As investors will see, there is a good reason behind the price action and the market’s reaction to the news.
While competitors like CF Industries Holdings Co. (NYSE: C.F.) and The Mosaic Co. (NYSE: MOS) present worthy opportunities, FMC remains a positive outlier regarding earnings per share (EPS) growth and current market sentiment around crop fertilizers and farming chemicals.
Getting the Big Picture
Despite contracting for the first time since 2020, the ISM Services PMI Index still indicates a few industries that remain a good place to find stocks that could beat the market this year, like agriculture and food services. The agriculture industry reported more than three consecutive months of expansion, meaning the odds of a quarterly earnings beat are more present than ever for stocks exposed to this space.
One of the concerns for the Federal Reserve (the Fed) regarding potential interest rate cuts this year stems from food inflation. However, a respondent in the food services industry noted a “steady improvement toward lower costs in food and beverages." Supporting the Fed’s 2% inflation target, FMC’s chemicals are vital to keeping this recovery going since farming yields wouldn’t be where they are today without them.
CF Industries’ quarterly presentation shows that the stocks-to-use ratio has risen in the past 12 months after a cyclical bottom in 2021, and Mosaic’s presentation follows this trend, reporting a significant decline in urea and grain prices due to rising available inventory. Because farming costs have come down a bit, and inventory, despite rising from its bottoming, is still near cyclical lows, the agricultural industry could see a continuation of its multi-month expansion path.
First Quarter 2024: Not as Bad as It Seems
At least management isn’t shy about the reality of FMC’s financials. The company’s press release highlights a 32% decline in annual revenue and a 56% plummet in earnings before interest, tax, depreciation, and amortization (EBITDA). Free Cash Flow (operating cash flow minus capital expenditures) is still negative, at a loss of $188 million, though a massive improvement from negative $727 million the year prior.
Despite these contracting financial results, markets are aware of the potential bottoming in the company’s trends. Backing these beliefs, management’s 2024 financial guidance suggests positive EBITDA between $900 million and $1.05 billion and free cash flow is expected to fall between $400 million and $600 million.
One segment that acted as an outlier was new product introductions (NPIs), particularly within the plant and health sales segment. This segment could play a crucial role in helping the company meet its management's projections for the year. A $50-$75 million cost reduction plan would also boost investor confidence in management's strategy. The question remains: Are markets and Wall Street analysts buying the story?
The Final Votes Are In
Analysts believe FMC’s EPS could grow by as much as 25% in the next 12 months, surpassing the expected 1% from CF Industries. Mosaic was excluded from most of the industry’s potential growth, as analysts project an 11.5% decline in EPS for the year.
Leading the growth in a growing industry, FMC stock has been bid up by UBS Group analysts, as they now see a valuation of up to $84 a share. The stock would need to rally by 25.7% from today’s prices to prove these targets right.
Markets are accepting both management’s and analysts’ expectations -- or so the stock’s forward P/E ratio would suggest. Trading at 13.5x places FMC stock above CF’s 12.7x and Mosaic’s 12.2x valuations today.
Typically, stocks trade at premium P/E valuations for a good reason, and investors can put a finger on FMC’s EPS growth as a good enough one. Despite trading at a premium valuation, the stock’s price action still gives investors a massive gap to be filled on this bullish momentum.
Investors can find FMC stock at 57% of its 52-week high today, underperforming the broader S&P 500 by as much as 65% over the past 12 months. Despite the lack of momentum this year, the stock still attracted up to $7.4 billion in institutional investments during the period, bringing its institutional ownership up to 91.9%.
