This year will mark an important milestone for FMC Corporation (FMC 3.90%) -- several milestones, actually.
In the first quarter of 2019, the company will complete the spin-off of its 85% equity stake in Livent Corporation, which recently debuted as a separate publicly traded entity after years of serving as the parent's lithium segment. That means all subsequent quarterly results for FMC Corporation will only include operations from its robust agricultural solutions portfolio, which was responsible for 91% of revenue and 93% of EBITDA through the first nine months of 2018. It also means the company can begin to execute on an ambitious five-year plan aimed at creating value for shareholders and cementing its leadership position in agricultural technology.
There are a number of moving parts, but these three primary business components should be top of mind for investors in the year ahead.
1. More telling year-over-year comparisons
The agricultural solutions segment received a huge shot in the arm last year after integrating $1.2 billion in assets acquired from DuPont the year before. In the first nine months of 2018 the segment's revenue and EBITDA grew 91% and 160%, respectively, compared to the same period last year. With the assets integrated, investors should prepare for much more pedestrian -- and far more revealing -- year-over-year comparisons in 2019.
How fast is the business really growing? What areas hold the most potential? These answers will soon be known. In the meantime, investors may want to alter their framework for evaluating the business to reflect these changes.
FMC is likely to seperate its agricultural solutions segment into four segments: insecticides, herbicides, fungicides, and other. This organization will better align the company's financial reporting with management's initiatives, including investing in its R&D pipeline, and developing product-by-product strategies to gain market share in the world's most important breadbaskets.
Through the first nine months of 2018, the agricultural solutions segment generated 57% of revenue from insecticides, which accounted for the majority of assets acquired from DuPont. Herbicides delivered 30% of segment revenue, while fungicides and other made up 6% and 7%, respectively. This revenue model reveals a little about where the business is headed.
2. Development of next-generation products
While FMC hit a home run with its purchase of DuPont assets, its current portfolio and pipeline are pervaded by notable deficiencies. For instance, FMC is simply not a major player in fungicides or important next-generation areas such as biologicals and precision agriculture.
The global fungicides market is around $16 billion, and the company only brought in $193 million from fungicides in the first nine months of 2018. Two important product launches between now and 2021 could generate up to $350 million in annual peak sales, which should help address the portfolio's current weakness in the area. In total, FMC estimates that all of the products in its R&D pipeline could add an additional $2.5 billion to $3 billion in total annual sales (not peak sales) by 2030.
Investors may not want to get carried away just yet. The current pipeline focuses mainly on traditional chemical inputs, but the future of agriculture probably won't be based in chemical components. Consider the rise of biologicals, which are next-generation crop treatments made from living bacteria. Existing products on the market today have been shown to increase yield and support healthy root systems, but the industry is racing to develop biologicals that could replace traditional chemical inputs and fertilizers. Advancements on this front could upend the company's existing and planned product launches.
FMC has publicly revealed just one biological product in early-stage development, although it says it want to develop a complete lineup. Similarly, the company is well behind peers in precision agriculture and digital offerings, so it may use its healthy cash position to acquire a start-up, or three, to fill these holes.
3. Execution of five-year plan
FMC will be eager to start executing its five-year plan once the Livent spin-off wraps up. The business expects to have $3 billion in uncommitted investable cash available to deploy in that five-year period, which could increase to $4.5 billion if the company takes on incremental debt. What's the plan for all that cash?
FMC said at its 2018 investor day, that it expects to distribute $1.3 billion in dividends over the next five years. The company announced in December 2018 that its annual payout will jump from just $0.66 per share to $1.60 per share beginning in 2019. The remaining $3.2 billion is expected to be used for share repurchases, with an active $1 billion share repurchase program already underway, which FMC estimates will be increased by an additional $2.2 billion.
Share buybacks might be the worst possible use of FMC's capital. Considering the company's notable technology deficiencies described above, long-term shareholders would be better served by using cash to make acquisitions in biologicals and digital agriculture.
All in on agricultural sciences
Investors will certainly be kept busy with FMC in 2019. After the spin-off of Livent is completed, the company will be all in on agricultural sciences. Now that new assets have been integrated, investors will be watching to see what the year-over-year growth comparisons actually look like. That could increase the importance of upcoming product launches in the eyes of Wall Street, while also revealing technology gaps in the pipeline.
The silver lining is that the business certainly has the financial flexibility to shore up its deficiencies. Whether or not management goes through with chasing short-term goals by doing excessive share buybacks, or instead chooses to focus on long-term growth, remains to be seen.
Check out the latest FMC Corporation earnings call transcript.