Hey, how's it going everyone? My name is Amos and welcome back to the Dividend Compounders show. I want to ask you a question: what makes an economic moat? Well, as you can see on your screen right now, a company has an economic moat if

they have a competitive advantage over their peers. And there's many different styles and flavors of economic moats, and it's not a guaranteed recipe for success. But companies that have economic moats tend to be dividend compounders. With cheese? But, um, yes, that's a shout-out to

the YouTube channel name. And today, we're going to be looking at a company with an economic moat, and that company is FMC, AKA Food Machinery and Chemical Corporation, ticker symbol FMC. Currently, they're down 12.7% uh, year-to-date since the

beginning of January of this year. And their 52-week range, the lowest price was at $50. They're currently trading for about, what, $56, $57? The highest point was around $68 a share. The dividend yield is 4.1%. And check this out: the current

trading multiple, the PE ratio right now, is 4.8. My goodness gracious! So I'm trying to figure out: is this company undervalued? Is it a delicious, dividend-paying company, or is it going to be disgusting? Well, in this video, we're

going to be looking at the intangibles, the numbers, the finances. And at the end, we're going to run some valuation models to figure out what the intrinsic valuation for FMC is going to be, and then I'll give you my personal take, opinion, and how I feel about this.

company. And for full transparency, I have been eyeballing this company like a creep for well over a year and a half. I have not pulled the trigger. At the time of me making this video, I do not own any shares. I don't want to be that guy that

throws spoilers out there, but if I've been watching it for almost 550 days, it can't be that bad of a company, right? And before I forget, what you see on the right side of your screen are their competitors. These are the other companies that pretty much do what they

do as well, but in a different manner or with different products and patents. I think it's a perfect way for me to segue into the next topic: What exactly is FMC? Their business model, and how do they make revenue? So, FMC is a crop chemical

producer. The easiest way that I can explain it for someone to understand this company is: Think of this company as the pharma industry—drugs that are made for humans, but instead of humans, for crops and produce. Meaning, farmers depend on their stuff to protect their crops from insects, disease, and other disasters.

And I know exactly what you're thinking: Being in the business of chemicals and food, it doesn't sound too good for the future. But they do have their bases covered, and that's because FMC also has environmentally friendly chemicals in their portfolio. So, you don't have to

just use that very synthetic, artificial crap if you don't want to as a farmer. And I think they're slowly trending in that way to make sure that their products are not obsolete in the future. So, who knows? It could be like that crazy person on TikTok that claims

that essential oils can bring your receding hairline back. You know, there's people that claim essential oils can just cure everything, and it's magic. I don't know about all that, but when it comes to FMC, their stuff actually works. And the data that you see on your screen

is the 2022 one because they haven't uploaded the 2023 or the 2024 one. But the information is not going to be that too far off. So, if you don't get it by now, FMC makes chemicals that allow crops to survive until harvest from all

different factors, and they sell their chemicals to farmers and agricultural corporations. So, it's not the sexiest business model, per se. And, as a matter of fact, I would argue it's pretty boring. Anything to do with the manufacturing or the production of food and protecting

that food, it's not really sexy. It's not Nvidia, Amazon, or Palantir. However, it does generate cash. It is a product that is necessary because, as humans, we require corn, soybeans, cotton, rice, wheat, and other raw and food materials to make highly processed crap that we love to

stuff our faces with. Not necessarily cotton, unless you're weird, but we do use that as a fabric and a textile to make all sorts of different crap. Unless, of course, someday drinking a tube of processed goo is going to replace all of our meals in nutrition, and it becomes

the norm. But, for the most part, food in the traditional sense, I don't see it going anywhere. So what exactly are the chemicals that we're talking about? We've got insecticides, herbicides, fungicides, biological seed treatments, micronutrients, anything to make sure

That little seedling that you plant in your, uh, farm grows up to be that big, juicy corn. And likewise, kind of like a pharmaceutical company, they're spending millions of dollars on R&D in order to create the next big chemical,

and to put exclusive patents on those chemicals that they make. Hence, an economic moat. No one else can make the exact type of chemical that they make. There could be alternatives from their competitors, but it's not going to do the exact same thing. And just like the

pharmaceutical industry that I used to work in and be a part of, their products have patents that are always changing and are expiring, which means once it expires, a generic form of it becomes readily available for other people to mass-produce. And so, consequently, in

order to stay, uh, relevant, FMC pumps out highly anticipated, uh, chemicals that claim to be better than before. They just have to. They have to continuously be spending money on R&D and be producing the next chemical in order to promise the farmers, like, "Hey, this time

it's really going to prevent the locusts from eating your, you know, soybeans," or whatever you want to say. So, I think if you're paying attention, we should all understand what this company is, what they do, and how they generate revenue. And on the topic of revenue, this is from

the 2024 figure. Geographically, I would say their revenue is pretty balanced, meaning FMC is not too overly, uh, dependent on one side of the world. They're pretty balanced across the board. Latin America currently makes up about, uh, 31% of their revenue source, and

insecticides. I know right here it says 58%, but as of right now, it makes up 60% of their revenue. And you might think, "Dude, that is really high. I might feel uncomfortable about this chemical spray making up a large portion of their

revenue. I don't like the idea of that." And to that, I kind of want to say this: with global warming on the rise, whether or not you want to believe in it, because of the temperature increase, there seem to be more bugs all around the world,

especially where you're trying to grow these crops. Which means FMC's product is going to be more valuable to the food industry because there's more pests and insects that they have to deal with. And now, let's try to answer the question of why is FMC trading near their 52-week

low? Like, what's going on? Is there some baggage? Is there a disaster, accounting probing, like, what's going on? So, in 2023, their stock price got absolutely annihilated. And that's when I put them on my watch list because I was like, "Wait,

hold on. This is a pretty high-quality company. Their stock price is crashing. What's going on?" The reason being is that there was less demand for their products in key regions that we talked about, such as Latin America and Asia. And, as you can see on your screen right now,

the stock crashed by about, what is that, 60% in 2023? Absolutely just got hammered. But it wasn't just less demand from the stakeholders that caused the stock price to crash. Alongside that, their inventory and overhead costs were a lot more than usual, and they reported

negative free cash flow. We're going to do a deep dive on their free cash flow later, but it is important to realize that in 2023 it got obliterated. Because there were high operational costs, the free cash flow? No bueno. And for an otherwise cash-heavy company to report negative

free cash flow made Wall Street punish the stock like it owed them lunch money. Agricultural chemicals is also an industry that operates in cycles. Sometimes there's a boom market, and sometimes there's a downturn market. In 2022, FMC saw the biggest increase in sales, so

everything, and the sentiment surrounding the company was really bullish. And then the following year, 2023, was the biggest decrease in sales that they have ever witnessed. And when you really stop to think about it, it makes sense when you think about their customer base: the

farmers and the other agricultural corporations. After you buy too much, you know, of chemicals and pesticides and herbicides, you don't really need to buy more until you use up what you already have in inventory and in your warehouses. It's kind of like

toothpaste: you've got to squeeze every ounce out before you open up a new one. It's basic economics of supply and demand. When they don't need to utilize and spray as much chemicals, they're not going to buy as much. And in a business

context, they do this so they can decrease their warehouse expenses of storing unused pesticides and herbicides and other stuff on their shelves. You can use that shelf space for something else. So a lot of farmers and agricultural corporations, they're kind of waiting for

the price to come back down there. And unfortunately, the reason why their stock price is still depressed and why FMC has not recovered is because the bad news kept continuing. Their industry has been very slow, so I would argue 2024 is the tail end of the slow downturn of their

industry cycle. So that is what has been happening. But what about their future and potential concerns? Obviously, their business model of selling chemicals is contingent upon people growing their plants and crops outdoors, like the way they've been doing for thousands of years. However, if any of

that changes and we completely move farming to, you know, inside shipping containers or warehouses, like some startup companies are doing right now, then I would argue FMC is going to be pretty much cooked. But that idea I just can't digest. Because when I think about

other parts of the world outside of North America, I think they're going to want to utilize the natural sun as a lighting source and the water that's near them and just grow it outdoors. It might be a little better on the P&L

than to invest in a shipping container farm or to grow stuff indoors, because then you've got to think about costs associated with running that building, and I just don't see it being feasible. However, that is a theory. And also, some other concerns: in places like Asia, like

Japan and South Korea and China, they're developing genetically modified seeds for their crops that they like to eat, like rice that is going to be naturally insect-repellent. That's pretty crazy for me to hear. However, the cool thing about FMC is that they also

Do herbicides, as we saw in the previous slide, they don't just protect your plants from insects, they also prevent unwanted plants from growing on your field. GMO seeds, those plants are going to still need protection from unwanted plants growing next to them because they're

going to be competing for the same fertilizer and nutrients. And as a farmer, you don't want the weed plants to grow in lieu of the rice ones, so they are still going to need herbicides regardless. So to me, I think FMC is going to be okay,

but something else of concern: their patents on some of their best-selling chemical sprays. By the way, what you see on your screen right now is the pipeline of different patents and R&D projects that are happening right now. And on that note, some of the patents on their

best-selling chemical sprays are indeed going to expire in the near future. Remember, I alluded to it earlier, and the rebuttal is this: I'm no farmer, but from my understanding, if you use a pesticide or insecticide for too long, like for 10

or 15 years, then soon enough the bugs are going to become resistant to that treatment. Like if you spray cockroaches with the exact same spray, the exact same formula, from the exact same year, in due time, the ones who do survive it are going to develop an

immunity to it. So I think the cool thing about FMC is that their product, their sprays and their chemicals, are constantly upgrading and evolving so that the locusts, cockroaches, grasshoppers, what have you, whatever eats their crops, are going to leave the farmer's crops alone.

Last concern that I found, this one's a reach. Like when you drop a bar of soap when you're taking a shower with all the boys and someone comes around and smacks you right in the balls. It's a reach. However, it's this AI-driven,

precision application. I know it's a long-winded way of saying AI could disrupt the chemical industry. Right now, when it comes to, like, spraying your crops and your fields to protect them from all sorts of unwanted trouble, it's a spray-and-pray. However, in the future,

specifically in regards to herbicides, there could be a device or a farm vehicle that utilizes AI in order to detect unwanted plants and then specifically do spot treatments to those areas with herbicide. Meaning, if they're going to be doing a spot treatment in a

specific area, instead of just spraying the whole darn field, this is going to reduce the dependence and volume of herbicide that farms and agricultural corporations use. It sounds scary when you first hear it, but then again, you've got to ask yourself, are these corporations

going to be and willing to invest in that type of tool? Because, between you and me, that sounds stupidly expensive, and the payment could be on a subscription timeline for all we know. And when you think about it, when you involve and increase the payroll by hiring engineers

in order to maintain those AI devices and all that, I don't know if these farmers are going to want to deal with that mess. However, those are the future concerns to think about. All that to say, it's not going to be smooth sailing.

for FMC, and if you can't tell by the name of this YouTube channel, we fancy dividends around this community. So what we're going to be taking a look at now is their dividend profile. So their current dividend yield is 4.1%, meaning for every share of FMC that

you own at about $57 a share, you get about $2.32 in dividends a year. The payout ratio on that is 20%. So this tells me that the dividend itself is very sustainable, it's healthy, and it's not going to harm the finances of

the company in order to give out to the shareholders. You love to see it. What you don't love to see is the fact that this company, whenever they go through a speed bump or a pickle, or they try to shove a pineapple right up their, well, they don't

grow the dividend. However, I love the fact that they continue the dividend while not cutting it. When we zoom out the stock performance of FMC, uh, back in 2014 they kind of went into a pickle for about a year or so, and that must have been one of their uh, cycle industry cycles

putting them down in that downturn. So from 2014 to 2016, the stock price took a hit. Remember that because the industry cycle hit did not just affect the company stock price, but it also affected the dividend payout. So as you can see, uh,

in the beginning of 2015, they paid out 14 cents every three months, every quarter, and they kept that exact same dividend payment until, if we scroll up here, the end of 2018. They played it conservative and safe instead of aggressively hiking a dividend that is

Not sustainable. They were like, 'Hey guys, listen, we're going to have to pause increasing the payment of the dividend because we don't want to hike the dividend payout and put our finances and operation in jeopardy.' That's what it tells me

about this company. It's in their DNA to pause dividend growth in order to save the company itself, and I love to see that. As we scroll up here, during the pandemic, they did not cut the dividend, but in fact, they consistently and reliably paid a dividend on time

every three months. But after they got through that financial pickle and they were paying 14 cents a quarter, they realized, 'Like, dude, we have way too much cash on hand, and we're doing share buybacks already. What else can we do to

help you guys out?' Well, I guess we're going to increase the dividend aggressively, and that is what they did. It went from 14 cents a quarter to 34 cents a quarter, and they were like, 'Okay, we're doing better than we thought.

We're going to increase it even more.' And it went from 34 cents to 40. Unfortunately, what happened right after December of 2019 going into the beginning of 2020? Well, the pandemic happened, and then they realized, 'Okay,

we're doing better than we thought we would. The impacts of the pandemic are not crushing us.' So they increased the dividend to 48 cents, and then to 53 cents, and then their final price increase was to 58 cents in December of 2022. And unfortunately, they have kept

that exact same payment and payout of uh 58 cents ever since they decided not to increase the payout. And I think that was a good business decision because they are currently going through an industry downturn, and they're going through a pickle with inflation and their vendors

destocking. They made the right decision. So what do I think about their dividend profile? I can't give it a grade of an A because they're not growing it year over year, and the growth rate is basically non-existent for the past two and a half years. However, I can say that

the business makes sound decisions in order to save the finances and operations of the corporation. So I would give it a B. I think the payout ratio is really low, meaning the dividend is sustainable. And I love the fact that the dividend payment is qualified, so it's

taxed at a favorable rate, and it's a 4.1% dividend yield. So there's a lot to like here. So I think we can look past the fact that they paused on dividend growth to save the company's operations. And then next up, let's go ahead and

consider their adjusted stock price, uh, total return, the performance, to see if it's even worth it. Because a dividend compounder, if you don't meet the criteria of having a good total return, then you're not a dividend compounder, because your money is not going to be

compounding over time. With that said, on the adjusted stock price total return, the year-to-date performance is -7%, not good. And, uh, if we zoom out, let's say five years, five years it's going to be 35%. However, when we zoom it out to 20...

years, then the total return has been 636%. So it has my seal of approval of being a dividend compounder. And as you can see right here, uh, 2014 to 2016, that was also another one of their downturns. And now they're experiencing a downturn

as well. And then we're at the tail end of it. And as you can see visually, most of their gains from 2016 onwards was wiped away in the past year and a half to two years. Not good to see, but it always puts things into perspective when

you look at it from a bird's-eye view. 636%, I think that's pretty good. That's pretty juicy. The next criteria or metric we're going to be looking at is their profit margin. Is this company profitable? And if they are, for every dollar that they generate, what is the leftover

profit? Let's scroll down and see what we got. And I have to tell you guys, it is absolutely and absurdly beautiful. So let's just look at it from the current context. The gross margin is 37%, but this is what I want to point out:

the net margin. That's what's important for me as an investor. That's what I am eyeballing and taking a look at. The net margin is 34.8%, meaning when you take into account all expenses in order to run the operation, what is left over as profit is

almost 35%. That is bonkers! This is like a software company. That's what you see in Google or Microsoft or Salesforce. But to see it in a chemical agricultural company is just wild. And yes, their operating margin is declining for the past two years, and that's because, as I told

You asked about the destocking, their operational costs, and inflation just smacking them right in the face, for the most part. Their operational margin is usually around, what, 19%? So that's probably what we can expect once they survive this downturn. But the net margin...

Oh, this is a beautiful picture to see. So when we think about their profit margins, this is an A+ for this company. And the next criteria is going to be the shares outstanding. We want to figure out if the company is issuing more shares every single year and diluting your shares, or...

are they buying back shares? That way, each share that you own has quality over quantity. There are a few things that piss me off, right? Number one is when adults don't know how to control their own emotions and they act like a child in the workplace and bully other coworkers.

That pisses me off. And number two is when companies issue more shares every single year to raise capital because their company sucks. And in the case of FMC, I am proud to say they are buying back shares almost every single year. Uh, when we look at 2009, there were about...

147 million shares outstanding. And yes, there were some years where they did issue a little bit of shares here and there, but for the most part, it is going in the right direction, and the trend is what you want to be looking at. Currently, there's about 125 million shares, and the...

last criteria that we're going to be looking at is the free cash flow. Let's figure out if this company is cash heavy or not. So in 2009, they posted $144 million of free cash flow, and we fast forward... uh, this appears to be when they...

went through that trouble. They posted at $400 million. It must have been the downturn of the industry cycle. And then when we fast forward over here, this is looking good. In 2021, $739 million of free cash flow. In 2023, they posted

$514 million of free cash flow. So, as we alluded to earlier, this is a company that operates in a cyclical industry. So every handful of years, it does, in fact, look like they post negative free cash flow. So that's not something that you love to see, but at least whenever they

survive and move past the downturn, they go right back to where they were as if nothing happened. So, and when we look at their free cash flow on a numerical basis, uh, 2009 was $144 million right before the negative last year, $490

million. I'm hoping, if all goes well, the free cash flow for their fiscal year of 2024, it... I would like to at least see it positive, but if it can be around $500 million or even $600 million, it would be a better story. So very recently, they

posted their, uh, Q3 2024 earnings. I can't even say that it's recent, because in a matter of days it's going to be 2025. But for the most part, this is the most recent earnings that we have to work with. And I'm going to say this; it's

going to shock you as well after hearing all the bad news. Oh, hey, there's cotton, what we talked about earlier. Their products help protect cotton. Anyway, management is seeing that profits and sales are bouncing back. Sales grew 9% year-over-year, and volume

grew by 177% on average. The adjusted EBITDA grew by 15% year-over-year. And the best part is, the leadership gave guidance of 19% revenue growth for the upcoming fourth quarter, which is pretty bullish to me. All that to say, if they

miss and it's only like 18%, bro, that's going to be catastrophic. So I think they had a lot of confidence in order to say 19%. And even though they gave such a bullish number, this company is still going through a sell-off. And I guess I

should have mentioned it earlier, but I think there's also fear in the stock market and on Wall Street surrounding the JFK Jr. pick because he's already waged war on the food industry and sector. So, and one thing that we know is that he does not like synthetic ingredients

and chemicals being in our food. And one way to impact that is to prevent chemicals from being sprayed on our food from the beginning. So this is a company that does have a little bit of uncertainty in the short term. But what I'm thinking is, if they proposed and

they're forecasting a 19% revenue growth, then it's probably going to be closer to like 20% or 21%. And they were so happy and giddy and sighing, they were like, "Hey, you know what? Let's apply a margin of safety

and say 19% instead of 21%." Because if they say, "Hey, 19% growth," but it turns out to be 21%, I think this stock might hit a little bounce, a little pop. So I guess we'll see what happens. But on paper, it

does look like in fact the industry is in recovery and in a rebound, so hopefully, FMC can ride that wave as well. Anyways, we made it to my most favorite part of the video. We're going to be running some valuation models here to figure out if the stock price is

actually undervalued. What you see on your screen right now are the peers and competitors that are in the exact same industry as FMC. The multiples valuation, the stock price is going to be $200 if they operated off of a 17 trading multiple, a PE ratio of 17.

Unfortunately, for FMC, their current PE ratio is a 4.6, super low, super low. The next one is going to be the discounted cash flow analysis model. I think this is one of Warren Buffett's preferred valuation models. So, the DCF price for FMC is going

to be $7.97. And the next one is going to be the dividend discount model. The DDM price, $53.30. Graham's valuation, $13.61, which brings us to the conclusion. And I forgot to mention, for every single one of these valuation models, I used

Is FMC Stock Undervalued? My Deep Dive Explained

Scripts