We believe FMC shares are significantly undervalued, currently trading in 5-star territory well below our $95 fair value estimate. FMC's narrow moat is derived from its patent-protected and differentiated premium crop protection products, which farmers are willing to pay a premium for due to their effectiveness in combating pests, including insects, weeds, and fungi that can harm crops and diminish yields.
Recently, FMC shares experienced a sell-off as the market expressed concerns about the growth outlook following two years of declining profits and management's guidance for lower results in the first half of 2025. This decline has primarily been driven by inventory destocking, as farmers and farm retailers accumulated excess supply during 2021 and 2022 due to concerns over COVID-related supply chain disruptions. As supply chains began to normalize in 2023, the excess inventory started to unwind, negatively impacting sales. This inventory fluctuation was particularly pronounced in Brazil, FMC's largest market. Consequently, while FMC outperformed its crop chemicals peers in 2021 and 2022, it has underperformed since then.
Another challenge is that FMC's diamides, a class of insecticides that target ryanodine receptors in insects, are set to go off patent in 2025. These diamides accounted for 35% of sales in 2024 and represent FMC's largest product category. However, the company has a robust pipeline of new products that we anticipate will more than offset the decline in diamide profits in the coming years.
We expect the end of inventory destocking and growth in new product sales to drive FMC's sales and profits back to growth starting in the second half of 2025. Increased profits should serve as a catalyst for the shares in the upcoming quarters.
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