Weekly Stock Call

July 14, 2010
Current Price – US$26.98

Archer Daniels Midland Company (ADM) presently appears to be trading at a discount to its intrinsic value and will likely see significant price correction as we exit the current recessionary period. As a commodity processor and distributor, the company’s earnings are highly sensitive to demand conditions for both inputs (crops and energy) and outputs (processed food, feed and energy products). Subdued demand conditions have currently depressed earnings; however, going forward, fundamental drivers such as growing emerging economies, rising expectations for high-quality food, and increasing global energy demands suggest improving conditions for ADM’s markets. One ADM’s largest revenue segments, Oilseeds, can generally pass input price increases through to consumers, meaning increased revenues would be expected to directly increase earnings without diminishing profit margins. Other segments may be able to pass price increases through to a lesser degree. Further, the stock should act as an effective hedge to inflation driven by increasing food and energy prices.

ADM is one of the world’s largest processors of oilseeds, corn, wheat, cocoa, and other feedstuffs and is principally engaged in procuring, transporting, storing, processing, and merchandising these agricultural commodities and their transformed products (food, feed and energy). The company derives annual revenues of US$69B from three primary business segments: Oilseeds Processing (35% of Sales), Corn Processing (11%) and Agricultural Services (46%). 


Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount model and, historical and industry price ratios) I arrive at a current valuation for Archer Daniels Midland Company of US$36.25.

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield       34.4%
Dividend yield   2.2%
Total return     36.6%


Risks

Listed below are some of the immediate risks faced by the company. For a more complete discussion of risk, refer to the company’s annual report.

Weather, Disease, Government Programs - The availability and price of the agricultural commodities utilized as raw materials, and the demand levels and selling prices of the products that the company produces, can be affected by weather, disease, or government programs and materially impact revenues and profits.

Energy - Fluctuations in energy prices could adversely affect the company’s operating results, in both revenues and costs.

Geopolitical – As a geographically diverse entity, ADM is subject to economic downturns, political instability and other risks of doing business globally which could adversely affect earnings. 

Risk Management - Hedging strategies to manage price, interest rate and foreign exchange risks may not be successful in mitigating the company’s exposure to these risks.


The Numbers

Share Price ($US) 26.98 
Market Cap ($US B) 17.3 
No. Shares (M) 643 
ROE 12.7%
ROA 5.0%
P/E Ratio 11.1 
Price/Sales Ratio 0.3 
Price/Book 1.2 
Current Ratio 2.1 
Interest Coverage 6.2 
Total Debt/Equity 0.47



Analyst – David Scollon

Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.


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