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Who are ADM?

Archer Daniels Midland Company (ADM) is a global leader in the agricultural, processing, and distribution of agricultural products, ingredients, and biofuels. The company operates in over 200 countries and territories and employs over 36,000 people.

Products include: corn, soybeans, wheat, and cotton; biofuels, such as ethanol and biodiesel, as well as other bioproducts, such as animal feed and food ingredients; and animal nutrition products, such as proteins, fats, and oils.

Scoreboard

The Bull Case

Bull Case 1: A Safe Haven?

I must admit, I do enjoy agricultural stocks. There will always be demand for food products, like soy-beans, corn and wheat; and for the other agricultural products.

Agricultural companies in general, and ADM is no exception, have large moats. It’s very challenge to take market share, simply because ADM own the land these products come from – and the infrastructure needed to harvest and distribute them.

Bull Case 2: Valuation

ADM’s P/E ratio (9.2) is attractive, both against an industry average of 16.9 and against a fair P/E (for ADM) of 17.

DFC also doesn’t look too bad; coming in at 2% lower valuation. Not a huge margin, but enough to offer a little extra security.

If analysts price targets of $93 are anywhere near accurate – this could be my time to buy.

Bull Case 3: Recent Expansion

There is evidence that ADM is expanding.

In February this year, ADM announced they had opens a probiotics facility in Valencia, to meet growing demand.

ADM expects its customer base to triple in the 5 years – and is ready to meet demand. 

Since global probiotics market is predicted to grow at an annual rate of 7.9% – this looks like a step in the right direction.

Bull Case 4: Biofuels

As an investor, I am certain that green policy and sustainability will continue to dominate company policy and have a marked impact on stock prices for many years to come.

ADM is a player in the biofuel and ethanol industries.

These will undoubtedly be beneficiaries of the growing wave of green.

One example of upcoming policy is the U.S Environmental Protection Agency’s blending quotas; which will see requirements for biofuel embedded in traditional oil refiners’ outputs.

The Bear Case

Bear Case 1: Average Financials

ADM’s financials aren’t necessary bad – but they’re not good either.

My major concern revolves around profit margin; net earnings to revenue ratio; and overall consistency.

The 10-year average for net earnings/revenue is 2.5%. For a company I want to invest in, I’m looking for a minimum of 15%, depending on the industry. And sure, for consumer staples 15% is too high – but sub 5% is unthinkable.

Free cash flow has also been declining, even when revenues have increased – which is one thing I really can’t see past.

Bear Case 2: Earnings Forecast

Past performance is more important than analyst forecasts, but they aren’t worth ignoring altogether.

Analysts’ forecasts are bleak.

ADM’s revenue is set to decrease by 12.5% annually by in the next three years. For me, revenue growth is vital.

And while the share price may be slightly undervalued right now; it’s really not in light of the next few years expectations – since I expect very little growth in the company’s share price.

Stock Price History

Additional Notes

The company has consistently made acquisitions; partnerships; securing itself in existing markets and expanding into new horizons.

One risk this snapshot has failed to consider is that of ADM’s revenue and costs are heavily influenced by commodities markets. ADM has low pricing power – which could spell disaster if the stars don’t align.

Conclusion

I think my company ratings above speak louder than words – this is a dead average company.

There is nothing that particularly excites me about ADM, apart from an unreliable upside potential – and a safe play for my portfolio.

Neither are reasons to invest, however, as there are better opportunities out there.

It’s always important to remember when choosing a company to invest in, that you feel excited by the prospect; because you know there’s something special. Sadly, that’s not the case with ADM.

Disclaimer

This is not financial advice. Reports are for educational purposes only. This has been created with the aim of teaching individuals about key investing terms and how I evaluate fundamentals. Investing in company shares always carries risk. It is crucial you conduct your own research, before carrying out financial or investment decisions.