Archer Daniels Midland (ADM) is one of the largest agricultural processors and food ingredient providers. Company was founded in 1902 and currently operates in more than 140 countries. Main operating segments are:
- Agricultural services – segment under pressure due to strong USD (lower export possibilities), good crops (well-supplied market)
- Corn processing – similar case with strong USD = weaker export, lower margins in ethanol (big inventories = low margins)
- Oilseeds processing – good results, stable situation
- WILD Flavors and Specialty Ingredients – strong USD + weaker EM -> lower export
(source: ADM Third Quarter 2015 Earnings Conference Call)
Prices of soft commodities are low, which negatively affects company, but if we look on volumes we can see that company is growing.
Company generates strong cash flow – within first three quarters company returned around $2.3B (10% market cap) to shareholders (vie buy back and dividends). Currently company has more than $1B in cash, which potentially can be returned as well.
At the end of the day business must be stable – ADM as one of the largest food ingredient provider has some competitive strength and demand for food is growing (due to population growth). In last 100 years soft commodity prices were low not once and company managed to increase shareholder’s value in long term.
As it comes to financials (estimates):
Market cap ~ $22B
Net debt ~$5.5B
Payout ratio ~40%
Beta = 1.28
Dividend yield 3% + buy back > 5% of market cap (!!) in 2015
Estimated valuation ratios:
P/E = 13.6
EV/EBITDA = 8.3
ADM is one of The Dividend Aristocrats with increasing dividends since 1976. Currently dividend yield is around 3% and historically it was one of the highest levels (apart from 2009). Although nominally 3% is not so much in my opinion it is important to notice that historically company was paying much less. For the last years dividends were growing very fast (due to low payout ratio)
From drawdown risk perspective situation is quite good. Share price dropped more than 30% from the top and although historically drawdown reached even more than 60% in my opinion current levels are acceptable.
It is interesting to see that in short term (one year) stock price is strongly correlated with iShares MSCI Emerging Markets ETF – pure accident.
Summing up – ADM is exactly the type of company which I am looking for – share price dropped, dividend yield is attractive from historical perspective, valuation is not demanding, company is struggling with (temporary) external factor – weak soft commodity prices. I think I will buy some shares in January 2016 and I hope to buy at current prices – around $36
Disclaimer ADM – no position