FMC Corp. NEUTRAL ZACKS CONSENSUS ESTIMATES (FMC-NYSE)

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1 February 17, 2015 FMC Corp. (FMC-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 12/17/2013 Current Price (02/16/15) $63.68 Target Price $ Week High $ Week Low $51.60 One-Year Return (%) Beta 1.05 Average Daily Volume (sh) 1,034,227 Shares Outstanding (mil) 134 Market Capitalization ($mil) $8,533 Short Interest Ratio (days) 4.36 Institutional Ownership (%) 89 Insider Ownership (%) 1 Annual Cash Dividend $0.60 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 8.0 Earnings Per Share (%) 14.9 Dividend (%) 25.7 using TTM EPS 15.8 using 2015 Estimate 17.0 using 2016 Estimate 13.8 Zacks Rank *: Short Term 1 3 months outlook 5 - Strong Sell * Definition / Disclosure on last page SUMMARY We are reaffirming our Neutral rating on FMC Corp. Profit for the fourth-quarter 2014 surged on gains across the health & nutrition and minerals businesses. Adjusted earnings topped the Zacks Consensus Estimate. Revenues fell due to lower sales in the core agriculture business, and missed expectations. FMC Corp. s strategic investments, Cheminova buyout and new product launches are expected to drive results in its agricultural business. Moreover, its new Thailand facility will support the growing functional ingredients market in Asia. However, the company is exposed to certain operational challenges, currency headwinds and raw material cost pressure. FMC Corp. is also seeing weak demand for some of its products in China, given the slowdown in that country s economy. Risk Level * Low, Type of Stock Large-Growth Industry Chem-Diversifd Zacks Industry Rank * 209 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 959 A 957 A 1,131 A 3,875 A A 988 A 1,016 A 1,092 A 4,038 A ,022 E 1,180 E 1,214 E 1,162 E 4,578 E ,973 E *Note: Revenues in 2013 do not add up to the annual figure due to divestment. Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $1.10 A $0.94 A $0.82 A $1.05 A $3.88 A 2014 $0.95 A $1.01 A $0.95 A $1.12 A $4.03 A 2015 $0.76 E $0.97 E $0.99 E $1.03 E $3.75 E 2016 $4.60 E *Note: EPS in 2013 do not add up to the annual figure due to divestment. Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Based in Philadelphia, Pennsylvania, FMC Corp. (FMC) is a leading diversified chemical company that serves agricultural, industrial, environmental and consumer markets across the globe. It is a leading maker of Lithium-based materials for primary and rechargeable batteries used in laptops, cellular phones and electric cars. The company conducts its business across North America, Europe, the Middle East, Africa, Latin America and the Asia Pacific. FMC Corp. originally operated through three segments Agricultural Products, Specialty Chemicals and Industrial Chemicals. However, the company restructured its reporting segments in April 2013 to four segments Agricultural Solutions, Health and Nutrition, Minerals and Peroxygens. FMC Corp., on Dec 13, 2013, landed a definitive deal to divest the Peroxygens business (focuses on hydrogen peroxide, specialty peroxygens and silicates used in markets such as environmental remediation and pulp and paper) to affiliates of J.P. Morgan Chase & Co s (JPM) private investment arm One Equity Partners. The company completed the $200 million transaction on Mar 3, Results from the unit has been be classified as discontinued operations starting third-quarter The Agricultural Solutions division (54% of 2014 sales) makes crop protection chemicals including insecticides, herbicides, and fungicides. These products have agricultural applications to increase crop yield and quality by controlling a vast spectrum of insects, weeds and disease. They also have use as pest control in non-agricultural markets. Insecticides represent the biggest product line in this division accounting for half of the division s revenues. The company access major Western European markets through Belchim Crop Protection N.V., a Belgium-based pesticide distribution company, in which it has an ownership interest. Moreover, FMC Corp. has joint venture arrangements with Nufarm Limited in three countries in Eastern Europe. The company accesses the North American market through major national and regional distributors and key Asian and Latin American markets through local independent distributors and its own sales and marketing organizations. The Health and Nutrition division (20% of 2014 sales) makes food ingredients used to boost texture, color, structure and physical stability, pharmaceutical additives for binding, encapsulation and disintegrant applications and ultrapure biopolymers used for medical devices. The Minerals unit (26% of 2014 sales) makes a vast range of inorganic materials including soda ash that is used in markets such as glass and detergents, and lithium used in energy storage, specialty polymers and pharmaceutical synthesis in industrial uses. FMC Corp., in March 2014, announced its plans to split itself into two independent public companies through the separation of its growth businesses Agricultural Solutions and Health and Nutrition from the cyclical Minerals division. However, the company modified this separation plan in Sep 2014 and said that it is selling its Alkali Chemicals unit (the largest global producer of natural soda ash) while retaining the lithium business. The company will keep its Lithium unit as a separate operating segment. FMC Corp., on February 3, 2015, landed a deal to divest its Alkali Chemicals business to chemicals company Tronox Limited (TROX) for $1.64 billion. The transaction is expected to complete in first-quarter Equity Research FMC Page 2

3 REASONS TO BUY FMC Corp. remains committed to expand its market position and strengthen its portfolio. Recent acquisitions and development agreements are also adding strength to the company s agricultural business, while expanding portfolio and the new Thailand facility are expected to drive earnings in the health and nutrition franchise. Continued market share gains and new product introductions (across corn, soybean and cotton markets) in North and Latin America are expected to support results in the company s agricultural business. The company has introduced a number of new brands in the market which are gaining good traction. Moreover, the Omega-3 product line is expected to drive results in the nutrition and health business. FMC Corp. is also optimistic about its lithium business as demand is expected to remain strong on the back of greater adoption in electric vehicles and other applications. Moreover, the sale of the alkali chemicals business will enable FMC Corp. to de-lever its balance sheet to an extent which is best fit for the company. It will also allow the company to focus on high-growth agriculture and health and nutrition markets. FMC Corp. maintains a strategy of growth through acquisitions and strategic collaborations. The $345 million acquisition of Omega-3 fatty acid maker Epax has bolstered its nutrition and health division and expanded its presence in the high-growth nutraceutical market. The acquisition is a strategic move by FMC Corp. to strengthen its position in the functional ingredients for the food, nutraceutical and pharmaceutical markets. The Omega-3 fatty acids market is expected to grow 12% to 15% annually and holds a market supply of $2.1 billion per year. In addition, the acquisition of pectin-related intellectual property from Switzerland-based Vigido AG, a unit of UniPektin Ingredients AG, boosted FMC Corp. s pectin portfolio and enhanced its expertise and capabilities in naturalbased food ingredients. Moreover, the company entered into a research and development deal with Quimica Agronomica de Mexico in early 2013 to jointly develop new biological fungicides and insecticides for use globally. The collaboration represents a part of FMC Corp. s efforts to offer its customers biological products which address their changing needs. The deal will help the company in expanding its crop protection portfolio. The company has also acquired exclusive rights to a patented, broad-spectrum crop protection product from Bayer CropScience, the subgroup of Bayer AG. Under the agreement, FMC Corp. will develop and distribute the promising new crop protection product for row crops in the U.S. and Canada. In a major move, the company agreed to buy crop protection products maker Cheminova A/S for $1.8 billion. The acquisition, which is expected to close in first-quarter 2015, is a strategic fit for FMC Corp. as Cheminova has a highly complementary product portfolio and technologies as well as geographic footprint. The buyout is expected to bolster FMC Corp.'s core agriculture business and reinforce its access in major agricultural end markets. Cheminova s technology will enable FMC Corp. to boost its foothold in crop segments while offering further access to additional crops including cereals. FMC Corp., in March 2013, broke ground on its new state-of-the-art microcrystalline cellulose (MCC) manufacturing plant in Thailand. The new facility in Rayong is its third MCC manufacturing plant. The company has already completed expansion at its BioPolymer MCC sites in Del., U.S., and Cork, Ireland. FMC Corp. is investing over $100 million in the Rayong facility which will supply its industryleading MCC products to fast-growing markets in Asia. The facility will help the company address the increasing demand for innovative food and beverage products in the continent. The Rayong facility is expected to boost FMC Corp. s worldwide MCC capacity for the food industry by 35%. The Thailand facility will be fully integrated with MCC production, blending, packaging and warehousing and will initially produce colloidal MCC, a key ingredient in food and beverages. The functional ingredients market in Asia has grown 12% annually over the past several years. The facility has been designed for future expansion and manufacture of different products for both the food and pharmaceutical markets. Equity Research FMC Page 3

4 REASONS TO SELL FMC Corp. s Minerals unit is a more cyclical business. This has partly triggered the company s decision to divest the alkali chemicals business. The company is also seeing weak demand for its health and nutrition products in some beverage applications in China, which is expected to continue in the near term. A slowdown in the Chinese economy (affecting buyer s behavior) coupled with tight inventory management by a few of the company s customers are contributing to lower demand for some of its products. FMC Corp. is also faced with challenging agriculture market fundamentals. Dry conditions in Brazil are hurting demand for its products to sugarcane farmers. Reduced acreage is also affecting demand for crop protection products (including cotton) in the country. The company is also seeing certain operational challenges in Argentina including import restrictions that are unfavorably affecting its cost structure. Rising operating costs in Argentina are expected to be a major headwind to earnings this year. FMC Corp. is exposed to significant currency headwind. The company saw unfavorable swings in exchange rates of Brazil, India, Australia, Indonesia and Japan relative to the U.S. dollar in 2013, affecting its results in the process. Unhedged currency translation reduced its earnings by roughly $13 million (or $0.09 per share) in 2013, mostly related to Brazilian real. Moreover, unfavorable currency movements had a $0.11 earnings headwind in While the company has taken up effective pricing strategy to offset the currency impact, its results remains susceptible to unfavorable translation impact moving ahead given the strengthening of the U.S. dollar versus a number of currencies including euro. The company s health and nutrition business, in particular, is susceptible to currency headwinds due to its significant euro exposure. FMC Corp. is seeing increasing costs for certain raw materials. The most significant cost pressure has been witnessed for seaweed-based raw materials. The company s alginate and carrageenan businesses are exposed to input cost pressure. Inability to adequately increase prices to offset higher raw material costs may hurt its results in the future reporting periods. RECENT NEWS FMC Corp.'s Q4 Earnings Outshine, Revenues Lag February 4, 2015 FMC Corp. s profit skyrocketed in fourth-quarter 2014 as healthy earnings across its health and nutrition and minerals businesses offset a decline in its agriculture franchise. Consolidated profit, as reported, shot up nearly three-fold year over year to $76.5 million or $0.57 per share in the reported quarter from $27.1 million or $0.20 per share a year ago. Adjusted earnings from continuing operations for the quarter were $1.12 per share, topping the Zacks Consensus Estimate of $1.00. Adjusted earnings exclude charges of $74.5 million (post-tax) including costs associated with acquisitions/divestitures and restructuring. For 2014, adjusted earnings of $4.03 per share also came ahead of the Zacks Consensus Estimate of $3.90. Revenues went down roughly 3% year over year to $1,092.2 million in the reported quarter, hurt by lower sales in the core Agricultural Solutions segment. The company witnessed a slowdown in the agriculture market, especially in Brazil, which weighed on the results for the division. Sales missed the Zacks Consensus Estimate of $1,180 million. Equity Research FMC Page 4

5 For the full year, revenues rose around 4% year over year to $4,037.7 million, but trailed the Zacks Consensus Estimate of $4,110 million. Segment Review Revenues from the Agricultural Solutions division slipped 7% year over year to $626.9 million in the quarter. Segment profits fell 5% to $130.3 million. The results were hit by weak demand in Brazil due to reduced cotton acreage, dry conditions affecting sugarcane and higher than usual inventory levels. This was partly offset by healthy demand in North America and other regions in Latin America. The company saw higher demand for pre-emergent herbicides in North America. Health and Nutrition segment s sales inched up 1% to $191.8 million in the quarter. Segment profit rose 9% to $44.2 million. Sales rose narrowly as healthy demand in global health markets and North American nutrition markets was masked by weak demand in beverage applications in China, lower demand for nutraceutical omega-3 products and currency headwind. Revenues from the Minerals unit went up 4% to $273.5 million. Profit jumped 32% year over year to $47.9 million as higher pricing, strong soda ash production and improved Lithium operations more than offset high cost environment in Argentina. Alkali Chemicals revenues rose 7% year over year on better pricing and higher volumes. Lithium sales, however, clipped 3% due to unfavorable product mix. Balance Sheet FMC Corp. ended 2014 with cash and cash equivalents of $109.5 million, down around 11% year over year. Long-term debt was $1,153.4 million, flat year over year. Outlook FMC Corp. said that it will provide detailed earnings per share outlook for first and second quarters and full-year 2015 during its investor day in New York City on Apr 16, FMC Corp. expects earnings in its Agricultural Solutions segment to be up 15%-30% in 2015 driven by contributions from its pending acquisition of Cheminova and market share gains across Asia and Europe, the Middle East and Africa (EMEA). The company, however, sees an uncertain macroeconomic backdrop. It expects crop protection markets to be flat to modestly down this year. For Health and Nutrition, earnings are forecast to be up by mid single-digit on modest demand recovery in the Chinese beverage market, sustained demand for pharmaceutical products and improvement in operational efficiency. FMC Corp. expects earnings for the Lithium unit will be in the band of $15 million to $25 million in The company sees higher pricing for lithium hydroxide and carbonate as demand for energy storage applications continues to rise at a double-digit clip. However, lower sourcing of lithium carbonate from third parties and weak butylithium demand will result in modestly lower revenues in Operational challenges in Argentina are expected to continue to weigh on earnings for this segment. FMC Corp. s Q3 Earnings, Revenues Trail Estimates October 29, 2014 FMC Corp. s profit jumped in third-quarter 2014 as it saw gains across the board, but its earnings fell short of expectations. Consolidated profit, as reported, climbed more than three-fold year over year to $56.3 million or $0.42 per share in the reported quarter from $17.9 million or $0.13 per share a year ago. Equity Research FMC Page 5

6 Adjusted earnings from continuing operations for the quarter were $0.95 per share, missing the Zacks Consensus Estimate by $0.01. Adjusted earnings exclude charges totaling $71.2 million including costs associated with restructuring, business separation and acquisitions. Revenues went up roughly 6% year over year to $1,015.9 million in the reported quarter on higher sales across all segments, but missed the Zacks Consensus Estimate of $1,058 million. Revenues rose despite a number of challenges in the quarter including sluggish demand for the company s products in certain beverage applications in China that affected parts of its health and nutrition business in the quarter. Segment Review Revenues from the Agricultural Solutions division moved up 4% year over year to $548.8 million in the quarter. Segment profits were up 2% to $116.7 million. The results were driven by higher demand of herbicides in Latin America and sustained market penetration of new products. This was partly offset by lower insecticide demand in the U.S. due to weaker-than-normal pest pressures and soft demand from sugarcane farmers in Brazil. Health and Nutrition segment s sales rose 7% to $203.1 million in the quarter. Segment profit went up 6% to $43.7 million. Sales were boosted by gains in global health markets and North American nutrition markets, partly masked by weakness in nutrition markets in Asia. Revenues from the Minerals unit leapt 11% to $264 million. Profit jumped 42% year over year to $39.2 million. Alkali Chemicals revenues rose 9% year over year on improved pricing and higher volumes. Lithium sales climbed 19% on higher production rates. Balance Sheet Cash and cash equivalents at the end of the quarter were $124.3 million, up around 13% year over year. Long-term debt jumped roughly 49% year over year to $1,151.9 million. Outlook FMC Corp. expects adjusted earnings in the range of $3.85 to $3.95 per share for The company expects earnings in its Agricultural Solutions segment to be flat to up low-single digit percent in the fourth quarter driven by new products and sustained market penetration in Latin America and demand for preemergent herbicides ahead of the 2015 growing season in North America. For Health and Nutrition, earnings are forecast to be flat year over year in the fourth quarter as higher demand in health markets coupled with increased demand for nutrition products in North America is expected to be offset by weak demand in Asia and delayed sales of omega-3 product line. FMC Corp. expects earnings in the Minerals segment to increase in mid-single digit clip in the fourth quarter as improved soda ash pricing and healthy operational performance will more than offset increased energy costs in Alkali and the unfavorable impact of operating in Argentina. Equity Research FMC Page 6

7 VALUATION Shares of FMC Corp. are currently trading at 17x our 2015 EPS estimate of $3.75. The company s current trailing 12-month earnings multiple is 15.8x, compared with 19.3x for the S&P 500 and 22.8x for the industry. Over the last five years, the company s shares have traded in the range of 12.6x to 20.5x trailing 12-month earnings. Our Neutral recommendation on the stock indicates that it will perform in line with the market. Our price target of $67 is based on 17.9x our 2015 earnings estimate. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low FMC Corp. (FMC) Industry Average S&P Axiall Corporation (AXLL) Airgas, Inc. (ARG) Cabot Corporation (CBT) Methanex Corporation (MEOH) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA FMC Corp. (FMC) Industry Average S&P Equity Research FMC Page 7

8 Earnings Surprise and Estimate Revision History Equity Research FMC Page 8

9 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of FMC. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform %, Neutral %, Underperform 7.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research FMC Page 9