Archer Daniels Midland Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities and products. It is a processor of oilseeds, corn, wheat, cocoa, and other agricultural commodities and is a manufacturer of vegetable oil and protein meal, corn sweeteners, flour, biodiesel, ethanol, and other food and feed ingredients. The Company also has a grain elevator and transportation network to procure, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, and barley, as well as processed agricultural commodities. The Company’s operations are classified into three business segments: Oilseeds Processing, Corn Processing, and Agricultural Services. The Oilseeds Processing segment includes activities related to the origination, merchandising, crushing, and further processing of oilseeds. Corn Processing segment is engaged in corn wet milling and dry milling activities.
Analysis:
Archer Daniels is at the epicenter of what many consider to be one of the world’s greatest problems – how to feed itself. The growth of large emerging markets in Asia and South America and the new middle class are requiring more resources. The company has a very long history – some positive and some negative. But there is no denying the fact that it has a very profitable history for shareholders. The world’s need for food producers will always be substantial. Although results can be commodity driven in the short-term, steady growth should persist for the long-term.
Financial results can be a bit choppy for such a large producer. However, ADM has a long history of sustaining above average return on capital and free cash flow. Book value growth has built consistently over the years as well.
Ultimately it is a commodity driven business as highlighted below;
Key Points
Outlook on ADM's four most influential share price drivers follows:
Ethanol operating profit per gallon is not expected to rally from current levels. ADM's share price has historically moved in close tandem with ethanol operating profit per gallon, which is expected to remain near its current level of $0.30 to $0.40 per gallon in coming quarters.
Ethanol prices should be stable over the next few quarters, which would neutralize a significant ADM share price driver.The price of ethanol to remain near $2 per gallon over the next several quarters driven by elevated corn and oil prices, a stable supply/demand balance and increased export potential with Brazilian ethanol currently priced above U.S. ethanol.
The growth rate of U.S. corn and soybean exports are expected to decelerate in coming quarters representing a small headwind for ADM shares.Both corn and soybean exports are expected to increase on a Y/Y basis in 2011, but there is growing evidence that export strength in September and October was driven by stockpiling strategies, which means that the current export run rate is likely unsustainable.
There should be decelerating system processing volume growth over the next four quarters could limit near-term share price gains. ADM's system processing volume growth may decelerate over the next two quarters as the company laps record U.S. soybean processing volumes and exports to Mexico, and in calendar second half of 2011 as ADM laps the addition of two new ethanol plants in summer 2010.
Investors tend to follow the export numbers as a gauge of global protein demand and global crop dislocation, as changes in the overall level of U.S. exports have only a small direct impact on ADM’s income statement.
Valuation:
Ratios – P/E (ttm) 12.3X
P/S .35X
P/B 1.5X
EV/EBIT 15.2X
Discounted Cash Flow Analysis –
Financials:
Current Developments:
ADM shares have historically been driven by ethanol operating profit, ethanol prices, corn and soybean export levels and system processing volume. Correlation analysis indicates that over the last six years, ADM’s share price has been most influenced by: 1) ethanol operating profit per gallon, 2) ethanol prices, 3) corn and soybean export levels and 4) ADM system processing volumes.
Outlook - For the December 2010 quarter, it is expected to be choppy waters for ADM on lower soybean crushing results and a large LIFO charge which have resulted in lower earnings estimates. However, the data suggests that we are reaching a turning point at ADM, and see the next 12 months as a period of incremental improvement. Ag. Services are very unstable, as trading profits in the Dec. quarter are expected to improve sequentially, but could be even better as the Ag. environment improves.
Oilseed Expectations Lowered - US soy utilization rates and crushing margins are down from the record levels produced last year.
LIFO Charges Expected in Q2 - LIFO inventory charges of $85 million.
Ag Services Remains Volatile - Overall factors are directionally positive for trading ops in Ag. Services. Sequential profit improvement is expected in 2011 and more upside is possible.
Ethanol Prices on the Upswing - Ethanol prices are up $0.23c/gal over the past month at $2.37/gal, driven by rising petroleum prices, & the recent extension of the $0.45/gal ethanol tax credit, which has driven margins from zero to $0.10/gal. 2011 EPS upside is possible at current ethanol prices.
Corn Sweetener Division Improving - Strong demand from emerging markets drive profitability in this area.
Risk:
- Increasing ethanol prices and ethanol profitability.
- Highly variable commodity inputs.
- Accelerating system processing volume growth may not materialize.
Conclusion:
Although the company faces some near-term headwinds, it continues to be one of the most dominant players in global food production. The world’s need for nutritious food produced in mass volumes continues to grow along with world population.
The Buffett-Munger screener is designed to find Buffett-type investments with extraordinary profitability, consistency, and future prospects. Our monthly Buffett-Munger Best Bargains Newsletter picks one stock from the screener. Our in-depth analysis shares with you why younger Buffett and Munger would like this stock. If you are a premium member, you can download it here. If you are not, we invite you for a 7-day Free Trial.
Analysis:
Archer Daniels is at the epicenter of what many consider to be one of the world’s greatest problems – how to feed itself. The growth of large emerging markets in Asia and South America and the new middle class are requiring more resources. The company has a very long history – some positive and some negative. But there is no denying the fact that it has a very profitable history for shareholders. The world’s need for food producers will always be substantial. Although results can be commodity driven in the short-term, steady growth should persist for the long-term.
Financial results can be a bit choppy for such a large producer. However, ADM has a long history of sustaining above average return on capital and free cash flow. Book value growth has built consistently over the years as well.
Ultimately it is a commodity driven business as highlighted below;
Key Points
Outlook on ADM's four most influential share price drivers follows:
Ethanol operating profit per gallon is not expected to rally from current levels. ADM's share price has historically moved in close tandem with ethanol operating profit per gallon, which is expected to remain near its current level of $0.30 to $0.40 per gallon in coming quarters.
Ethanol prices should be stable over the next few quarters, which would neutralize a significant ADM share price driver.The price of ethanol to remain near $2 per gallon over the next several quarters driven by elevated corn and oil prices, a stable supply/demand balance and increased export potential with Brazilian ethanol currently priced above U.S. ethanol.
The growth rate of U.S. corn and soybean exports are expected to decelerate in coming quarters representing a small headwind for ADM shares.Both corn and soybean exports are expected to increase on a Y/Y basis in 2011, but there is growing evidence that export strength in September and October was driven by stockpiling strategies, which means that the current export run rate is likely unsustainable.
There should be decelerating system processing volume growth over the next four quarters could limit near-term share price gains. ADM's system processing volume growth may decelerate over the next two quarters as the company laps record U.S. soybean processing volumes and exports to Mexico, and in calendar second half of 2011 as ADM laps the addition of two new ethanol plants in summer 2010.
Investors tend to follow the export numbers as a gauge of global protein demand and global crop dislocation, as changes in the overall level of U.S. exports have only a small direct impact on ADM’s income statement.
Valuation:
Ratios – P/E (ttm) 12.3X
P/S .35X
P/B 1.5X
EV/EBIT 15.2X
Discounted Cash Flow Analysis –
| 10 year growth | Margin of Safety |
| 5% | 37% |
| 5-10% | 47% |
| 12.5% | 7% |
Financials:
| Book Value / Share | Return on Equity | Return on Assets | |
| June 2010 | $22.86 | 13.2% | 6.1% |
| June 2009 | $21.23 | 12.4% | 5.3% |
| June 2008 | $20.95 | 13.2% | 4.8% |
| June 2007 | $17.48 | 19.2% | 8.6% |
| June 2006 | $14.96 | 13.4% | 6.2% |
| June 2005 | $12.97 | 12.4% | 5.6% |
| June 2004 | $11.83 | 6.4% | 2.6% |
| June 2003 | $10.96 | 6.4% | 2.6% |
| June 2002 | $10.39 | 7.6% | 3.3% |
| June 2001 | $9.56 | 6.1% | 2.7% |
Current Developments:
ADM shares have historically been driven by ethanol operating profit, ethanol prices, corn and soybean export levels and system processing volume. Correlation analysis indicates that over the last six years, ADM’s share price has been most influenced by: 1) ethanol operating profit per gallon, 2) ethanol prices, 3) corn and soybean export levels and 4) ADM system processing volumes.
Outlook - For the December 2010 quarter, it is expected to be choppy waters for ADM on lower soybean crushing results and a large LIFO charge which have resulted in lower earnings estimates. However, the data suggests that we are reaching a turning point at ADM, and see the next 12 months as a period of incremental improvement. Ag. Services are very unstable, as trading profits in the Dec. quarter are expected to improve sequentially, but could be even better as the Ag. environment improves.
Oilseed Expectations Lowered - US soy utilization rates and crushing margins are down from the record levels produced last year.
LIFO Charges Expected in Q2 - LIFO inventory charges of $85 million.
Ag Services Remains Volatile - Overall factors are directionally positive for trading ops in Ag. Services. Sequential profit improvement is expected in 2011 and more upside is possible.
Ethanol Prices on the Upswing - Ethanol prices are up $0.23c/gal over the past month at $2.37/gal, driven by rising petroleum prices, & the recent extension of the $0.45/gal ethanol tax credit, which has driven margins from zero to $0.10/gal. 2011 EPS upside is possible at current ethanol prices.
Corn Sweetener Division Improving - Strong demand from emerging markets drive profitability in this area.
Risk:
- Increasing ethanol prices and ethanol profitability.
- Highly variable commodity inputs.
- Accelerating system processing volume growth may not materialize.
Conclusion:
Although the company faces some near-term headwinds, it continues to be one of the most dominant players in global food production. The world’s need for nutritious food produced in mass volumes continues to grow along with world population.
The Buffett-Munger screener is designed to find Buffett-type investments with extraordinary profitability, consistency, and future prospects. Our monthly Buffett-Munger Best Bargains Newsletter picks one stock from the screener. Our in-depth analysis shares with you why younger Buffett and Munger would like this stock. If you are a premium member, you can download it here. If you are not, we invite you for a 7-day Free Trial.
