In this article, let's take a look at Archer-Daniels-Midland Company (ADM, Financial), a $32.77 billion market cap company that is one of the world's leading agribusiness concerns with major market positions in agricultural processing and merchandising.
Low margins
The business consists on procuring, transporting, storing, processing and merchandising agricultural commodities and products. In other words, it buys, processes and sells agricultural commodities. For example, it purchases crops and sells them to different buyers. Commodities are available from competitors, so it has little pricing power that affects margins. As we are going to see later, the net margin is considered low.
China´s population
Soybeans and corn are key products for the firm, and we think the increased Chinese soybean consumption had benefited the firm. In the future, we expect a major demand due to the increased population in China as well as income per capita would improve.
Other countries
The company focuses on expansion, so the international markets are very important areas to exploit. On May, it announced the opening of a new crushing plant in Paraguay that will boost its South American oilseed crushing capacity and increased soybean acreage in this continent.
Principal risk
We believe the major risk is the uncertainty of the weather, which affects the cash flows and thus lets them be characterized as volatile.
Revenues, margins and profitability
Looking at profitability, revenue declined by 15.32% but earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.14 vs $0.72).
The net income increased by 56.9% when compared to the same quarter one year prior, from $476.00 million to $747.00 million. The net margin is at 2.27% which is ranked higher than 64% of the 1,681 companies in the Farm Products industry.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| ADM | RCHER-DANIELS-MIDLAND | 9.59 |
| BRID | Bridgford Foods Corp | -7.72 |
| DAR | Darling Ingredients Inc | 0.91 |
| ALCO | Alico Inc | 5.66 |
| FDP | Fresh Del Monte Produce Inc | -0.06 |
| Â | Industry Median | 8.75 |
The company has a current ROE of 9.59% which is higher than the industry median and the one exhibit by Bridgford Foods Corp (BRID, Financial), Darling Ingredients Inc (DAR, Financial), Alico Inc (ALCO, Financial)Â and Fresh Del Monte Produce Inc (FDP, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 17.5x, trading at a discount compared to an average of 25.3x for the industry. To use another metric, its price-to-book ratio of 1.63x indicates a discount versus the industry average of 2.04x while the price-to-sales ratio of 0.4x is below the industry average of 1.13x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $19,153, which represents a 13.9% compound annual growth rate (CAGR).
The stock has risen by 26.47% over the past year, outperforming the S&P 500 Index.
Final comment
As outlined in the article, we believe the company should benefit as emerging economies consume more meat. Moreover, the PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like John Burbank (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014, as well as Pioneer Investments (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned.
