Shares of agricultural chemicals maker FMC Corporation (FMC 1.14%) rallied 17.5% in December, according to data from S&P Global Market Intelligence.
The insecticide producer came into the month on a very down note. In fact, despite the December bounce, FMC was the second-worst performer in the S&P 500 index in 2023.
However, with a low valuation and recent guidance for quarter-over-quarter growth, the company announced a cost-saving restructuring plan. That was cheered by bottom-fishing investors who bought the stock heading into the new year.
Cost savings of $150 million are on the way
FMC has been caught in a severe inventory correction affecting its distributors, who have decreased their purchases of FMC's products. The de-stocking occurred because of several factors, including distributors having double-ordered product during the post-pandemic supply-chain snarls, as well as higher interest rates making holding inventory more costly.
FMC management didn't anticipate this de-stocking particularly well, and the company's revenue and profits took a severe hit during most of 2023. For the full year, the company projects a 21% decline in revenue, a 29% decline in adjusted EBITDA, and a 48% decline in adjusted (non-GAAP) earnings per share.
That being said, management also projected a quarter-over-quarter revenue increase for the just-ended fourth quarter, so investors may be getting optimistic that FMC stock is at or near a bottom.
Furthermore, in mid-December, the company announced a new restructuring plan. The plan calls for $50 million to $75 million in savings in 2024, which will mostly come from headcount reductions in the company's Brazil business, which has been among the hardest-hit geographies. Additionally, FMC projects it will ultimately find $150 million in cost savings by the end of 2025 once the restructuring plan is fully implemented. One-time severance charges are projected to be $20 million to $40 million. Of note, the company forecasts about $1 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2023.
Apparently, investors liked the prospect of some housecleaning and cost reductions, combined with the prospect of a potential bottoming process.
Is FMC a contrarian buy?
FMC looks cheap today at just 13 times earnings, well below its average valuation over the past five years, which has been in the high-teens to low-twenties.
Of course, risks remain. First, it's unclear to what extent the pesticide market will turn around. Second, generic competition is a concern for FMC, which tends to make higher-priced branded products, as several key industry patents have expired over the past decade.
So while FMC's low valuation, high 3.8% dividend, and cost-cutting plan are positives, investors should try to get comfortable with the company's continued innovation and ability to charge a premium for its agricultural products. If one gains confidence on those fronts, FMC may be an interesting contrarian buy for 2024.
