Archer-Daniels-Midland: Performing Well in Uncertain Times
Stock Analysis & Ideas

Archer-Daniels-Midland: Performing Well in Uncertain Times

Benjamin Graham is the father of value investing. Graham would be proud of Archer-Daniels-Midland (ADM). The company buys, transports, and processes agricultural products into food, feed, chemicals, and energy products in highly innovative ways.

It has prospered since its founding around the turn of the 20th century. ADM is the largest of its kind. It has operations in over 190 countries and over 39,000 full-time employees. It has also paid a dividend for over 90 consecutive years.

Positive sentiment abounds, technicals and fundamentals are positive, and conditions are ripe for the share price to move higher. I am leaning toward the bullish camp.

Wall Street’s Take

The prevailing sentiment for ADM is bullish. Analysts split pretty evenly between Buy and Hold ratings now that the share price is near its 52-week high. I think the average price target might move near to $90 per share over the next 12 months.

ADM shares slipped in recent days. Wall Street assessments predict the stock will move down more. The average Archer Daniels Midland price target is $73.63, implying 9.4% downside potential. The lowest price target is $63, and the highest is $88.

You Are What You Eat

ADM buys and sells agricultural raw materials, including oilseeds, corn, wheat, milo, oats, barley, vegetable oils, and protein meals. It develops ingredients for food and feed, vegetable oils, margarine, and shortening.

The biodiesel and glycols produced are used in chemicals, paints, and other industrial products. ADM is the world leader in making ethyl alcohol and ethanol. Its corn gluten makes feed and meal, distillers’ grains, citric acids more.

ADM influences financial markets; it is a futures commission merchant. Income and profits are generated from structured trade finance activities. ADM offers commodity brokerage and other financial services.

Outside Influences

ADM’s share price began its ascent at the time Russia occupied Crimea in 2014. Commodity prices increased at the same time. Russia produces gigantic amounts of potash and phosphate, key ingredients in fertilizers for crops.

In response to recent economic sanctions, about two weeks ago, the Russian government ordered its producers to halt fertilizer exports. BBC News calls the invasion of Ukraine “catastrophic for global food.”

China’s demands are driving up food prices, too. China imports corn, wheat, soybeans, seed oils, and animal feed. Domestically-grown food and feed are in short supply from never-ending COVID-19 outbreaks and African Swine Flu. Trade issues specialist Stephen Olson claims, “Any disruption in shipments from Ukraine to China would undoubtedly create inflationary pressures.”

ADM shares were stagnant for quite some time. In 2014, they rose into the $52 range and held steady. The price plummeted in the early days of the 2020 pandemic, bottoming at about $32. As Russia positioned troops for an invasion of Ukraine, ADM shares rose.

They are up ~40% in the past 12 months, and they recently hit a high of $87.99. Energy and agricultural commodities prices shot up fast and furiously, setting new records after the invasion began.

The Positives

On the heels of the extrinsic events, in February, the company released a strong Q4-2021 financial report and a positive outlook for the coming year. Investors responded aggressively.

Productivity in the company expanded. Fiscal Year 2021 revenue topped $85 billion after three consecutive years of revenue, circling around $64.3 billion. Revenue for the quarter grew 28.4% over the same quarter last year.

Management announced a voracious buyback of stock, upped the dividend, and has intentions to deleverage the balance sheet. The CEO expects demand and margins to remain steady for ADM products and earnings.  

Q3-2021 earnings per share came in at $0.93 versus estimates of $0.89. Q4-2021 earnings per share were significantly higher, at $1.50. The dividend yield is 1.95%, with a payout ratio of around 29%.

ADM’s dividend bumped from $0.37 through 2021 to $0.40 in Q1 2022. The buyback announcement, the earnings per share pop, and the dividend increase combine to give traction to the positive sentiment.

Free cash flow was about $5.4 billion in the past 12 months and is expected to drop to $2.4 billion for Fiscal 2022. The free cash flow covers the ~$9.5 billion in debt that the company plans to chisel down. 

ADM announced in September 2021, it closed on $750 million of 2.7% notes due in 2051. The low-interest notes were used to pay off higher-cost debt and forefend higher interest borrowings after the Fed raises rates.

Some Caveats Mar the Takeaway

Headwinds loom for ADM. The company employs more than 630 staff in Ukraine. It operates a grain terminal and six silos in or near the port of Odesa, now under threat from Russian troops.

Its trading office is in Kyiv. It owns a now-shuttered Ukrainian sunseed crushing plant and other facilities. Management describes Russian operations as a small footprint.

ADM insiders sold $43.5 million worth of stock in the last three months and Hedge Funds sold 220k shares last quarter. Both groups took some profits.

On May 2, 2022, analysts are forecasting the company to report a drop in Q1-2022 earnings per share to $1.35. Last year, the Q1-2021 EPS was $1.39. However, ADM enjoys a history of beating forecasts. I expect the company earnings per share closer to that of last year. The stock is not volatile, as reflected in its levered beta of 0.72 and short interest of around 1%.

I’m convinced that management is committed to sticking with its business plan that works to enrich investors and short circuit the threats to the world food supply. I believe ADM shares deserve to move up because the stock is worth a higher valuation.

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