Breaking Up Is Good to Do: Adding FMC to My Picks Portfolio
06/12/2014 5:20 pm EST
Given the fact that it's currently a very difficult time to find reasonably priced stocks with decent growth stories, MoneyShow's Jim Jubak suggests looking at restructuring stories instead, like this one he's set his sights on.
US stock prices are at, or near, record highs. US and global growth is forecast to be sluggish, with the World Bank on June 11 lowering its forecast for growth in 2014 to 2.8% from 3.2%.
Certainly it's a tough time to find stocks that seem reasonably priced and that yet have better than average growth stories. One place to look is at company-specific restructuring stories that will bring out the value of the company's exposure to significant sector-specific growth trends.
I think that describes my pick today for my Jubak's Picks portfolio.
FMC (FMC) is a confusing mix of pesticides, herbicides, health and nutrition, soda ash, and lithium. That's made it hard for the company to command any kind of a premium valuation—if you liked the company's pesticides business, for example, did you really want to own the soda ash mining unit? And if you liked the growth prospects in the lithium business, did you like it as much as purer (but not pure) plays such as Sociedad Quimica y Minera de Chile (SQM)?
But on March 10, the company announced that sometime in the first quarter of 2015 it would split into two companies with pre-split shareholders receiving shares in both of the resulting companies.
The first company, so far known as New FMC, will contain the pesticide, herbicide, and nutrition businesses. The second company, so far known as FMC Minerals, will own the soda ash and lithium units.
New FMC is getting a fast growing agricultural chemicals business (74% of sales at New FMC) that is leveraged to the expanding agricultural production of Brazil. Latin America accounts for about 55% of sales for the agricultural chemicals business. Planted acreage for crops such as soybeans is projected by Credit Suisse to grow by 2.5% to 3% a year for the next few years. (Most of this expansion will come from the conversion of grazing land and not Brazil's rain forests, according to Credit Suisse.) Demand in Brazil for agricultural chemicals has tended to grow at five to six times the expansion in acreage, thanks to a climate that allows for multiple crops during a year and that lacks the cold weather that kills off bugs and weeds. Margins in the current agricultural chemicals business have ranged from 24% to 26%, which is higher than at most competitors. Sales growth that has averaged 20% annually, but that looks likely to drop to 15% in 2014, is higher than for any competitor besides Monsanto (MON). Sales at Monsanto are projected to grow by 16% in 2014; growth at Syngenta (SYT) and DuPont (DD) is projected at 5.2% and 5.5%, respectively in 2014. The current trailing-12-month PE for Monsanto is 24.2 and the forward PE on projected earnings for the fiscal year that ends in August 2014 is 23.1. FMC's trailing PE ratio is 22.1 and its forward ratio is 17.5 for the year that ends in December 2014.
The nutrition and health business—26% of current sales—that will also go into New FMC supplies functional ingredients such as the stabilizers carrageenan and pectin, and natural colorants to the food and pharmaceutical sectors. With the 2013 acquisition of Epax, FMC moved into the nutritional supplement market (Omega-3 from fish oils). Sales in the nutrition and health business are forecast to grow by 18% in 2014 thanks to the Epax acquisition before settling into a longer trend at 8%, or so.
The bulk of revenue (77%) in FMC Minerals will come from the slow growing soda ash business. (Soda ash is used to make glass and to adjust the pH in detergents.) It's a cyclical market that has averaged 2% to 3% growth over recent cycles.
FMC is the third largest lithium producer by revenue-behind SQM and Rockwood Holdings (ROC). The market for lithium in energy storage devices (batteries) made up about 29% of lithium sales at FMC in 2013. The battery market for lithium is projected to grow by 10% to 15% for the next few years, according to Credit Suisse, and then accelerate with growth in the market for electric cars and for storage in wind and other sources of renewable energy. Thanks to an expansion in lithium capacity, and to an end to production problems, lithium earnings at FMC are projected to increase by 15% to 20% in 2015 from 2014 levels.
It's always hard to predict how investors will react to a restructuring that turns one very confusing company into two simpler and more focused ones. I think it's reasonable to think that New FMC will receive something like the 17.5 forward PE now accorded Syngenta, or perhaps a little higher. The PE for FMC Minerals is likely to be some mix of a low 10 to 11 PE for the soda ash unit and a 20, or so, PE for the faster growing lithium business. That works out to a sum of the parts valuation of $95—which is my target price of early 2015. That's 23% higher than the June 12 closing price of $76.96.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I'll disclose my positions here.