Shares of agricultural chemicals maker FMC Corporation(NYSE: FMC) 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.
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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
