Shares of agricultural chemical producer FMC (FMC +2.00%) plunged 54.9% in October, according to data from S&P Global Market Intelligence.
FMC held its third-quarter earnings report on Oct. 30 that spooked investors, resulting in the bulk of the decline right at the end of the month.
Now trading at just a mid-single-digit earnings multiple, investors are asking themselves if the sell-off is a bargain opportunity. But sell-side analysts issued cautious notes even after earnings, suggesting the stock may be a value trap.
NYSE: FMC
Key Data Points
FMC misses as it prepares to sell off its India business
In the third quarter, FMC reported what looked like disastrous figures, but were heavily affected by accounting changes due to impairments in its India business, which the company announced it's putting up for sale.
Adjusting figures for the India sale and stripping out prior-year India revenue, things weren't as bad, but still not good. Revenue was down 3.7% and ex-India earnings before interest, taxes, depreciation, and amortization (EBITDA) actually rose 23%, thanks to cost cuts and restructuring. For the full year, FMC management expects revenue to decline 7% and adjusted EBITDA to fall 6%, when stripping out the India business.
Given that the adjusted declines didn't look that disastrous, did FMC shares warrant such a big sell-off?
It probably didn't help that management also prudently decided to slash the company's quarterly dividend per share to just $0.08, down from the prior payout of $0.58. When a company slashes its dividend like that, many yield-focused investors and funds flee the scene, even if the dividend cut is the right thing to do for the business. In this case, FMC management is rightly targeting the company's $4 billion-plus in net debt.
So, it's possible the October drop, which has resulted in the stock now trading at just 4.7 times this year's earnings estimates, is overblown.
Image source: Getty Images.
However, analysts aren't convinced
In the wake of the earnings drop, Wall Street analysts remained cautious on the stock for a number of reasons. First, FMC's agricultural chemical products are facing generic competition, which resulted in pricing pressure during last quarter. Moreover, the company appears to be having trouble collecting payment from customers in Brazil and Argentina, which are experiencing a credit crunch.
So FMC's high debt load, cyclical business, and lingering cash collection problems are all keeping investors and analysts away at the moment. However, if FMC manages to sell its India business for a decent price, its collections return to normal, and it keeps costs in check, there is potential for a turnaround.
Therefore, FMC is a high-risk turnaround opportunity for those looking to dig deeper into this messy story.
