With the economy semi-officially pronounced as in, or on, the verge of a recession, investors are looking for good news. The agricultural business, heavily related to commodities and commodity prices, has seen its difficulties, yet several companies are plowing through these times and doing quite well. Global agricultural conglomerate Archer Daniels Midland (NYSE: ADM) is one.
ADM, the agricultural commodities and products company, manufactures, stores, processes, transports and sells a wide variety of agricultural and agriculture-related products. It has three divisions: the Oilseeds Processing division, which concentrates mainly on soy, peanut, cottonseed and other oilseed processing and products; the Corn Processing division, which produces corn-based products such as syrups, starches, glucose and dextrose for food and biofuel manufacturing; and Agricultural Services, which involves a wide array of operations such as hydroponic greenhouses which grow vegetables, and aquaculture, which includes raising fish for consumer purchase. The company mills wheat, corn and milo, and is involved in numerous other feedstock, industrial and consumer operations.
ADM has a market cap of $27.5 B, and in 2007 it generated $44 B in revenue, which translated to $2.2 B in net income. Its EPS was $2.35 on a fully diluted basis. Consensus estimates call for $2.82 EPS in the fiscal year which ends in June, 2008, with projections at an EPS of $3.22 for fiscal 2009. The stock has traded between 31.28 and 47.33 the last twelve months, with a recent closing price of 42.53. Of note is that the stock has risen from its low of around $15 a share five years ago, to its high of $47 in the last year, tripling in value.
While the stock markets have seen many large caps plummet in value this year, and while ADM’s results are hardly spectacular, holding its own in a difficult investing climate is not a bad performance. The questions specific to ADM and its industry revolve around pricing pressures for the raw materials AGM uses. The price of corn, a chief commodity in ADM’s agriculture business, has been rising as plantings are slightly less this year. While this cost has been offset somewhat by higher ethanol sales prices, the increased supply of ethanol on the market is expected to drive those selling prices down. Also, there has been an 18% increase in soy planting, which may be cut back when the expected glut of biofuels hits the market, making it more costly. Agricultural storage is expected to drop-off for ADM, and the cost of transporting the ADM agricultural products by rail has been rising.
Still, in the face of these headwinds, ADM has maintained (and is expected to maintain) a 15% growth rate. Even if analysts trim the earnings estimates for next year, this is still a very impressive record given the current economy. Critics have not factored in the abiding strength of ADM’s operations and management, or the fact that food-price increases are being passed along down the line in the real economy, all the way to the supermarket shelf. In addition to this, ADM is a potent global player in the food economy, with its growing international operations. Seed and feedstock continue to be huge demand businesses, and worldwide demand for food and agricultural products translates ADM into a bull market, if not a future boom. This growing worldwide demand is not expected to abate anytime soon.
In other developments, ADM has filed a price-fixing suit against the major railroads, which observers maintain has merit and could be troublesome for the railroads. This may eventually offset some of the agricultural giant’s transport costs. ADM continues to expand by developing products such as vitamins, nutritional plant sterols (phytosterols), soy proteins, healthy fats, and related goods while expanding its outreach into industrial and chemical products. Its main seed and grain processing business, however, is so large that it should weather the various downturns and pressures with the biofuels and the raw material price increases it must pay. This is what some investors seem to be leaving out of the calculations about ADM’s future prospects, immediate and long term. Its massive strengths and strategic positioning have put it in a good place to meet the challenges of its business now and in the future. It’s another huge company in plain sight that many traders and investors tend to overlook.
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