Does the Disposal of its Cocoa Division Make Archer Daniels Midland Company (ADM) a Buy?

But does this disposal make Archer Daniels a buy?

The disposal of the loss making cocoa division and the company’s recent acquisition of Australian based Grain Corp. should be beneficial to earnings in the short term. However, the company is facing unrealistic comparisons from last year when the drought in the US pushed grain prices to artificial highs allowing the company to book record profits.

Having said that, Archer Daniels Midland Company (NYSE:ADM) is expected to report earnings of $3.02 per share for next year, which values the company on a low forward price-to-earnings ratio of 11. In comparison, Archer Daniels’ close competitor Bunge Ltd (NYSE:BG), which is driving profits off the back of rising ethanol prices in Brazil, is predicted to report earnings of $8.12 per share, putting it on a forward price-to-earnings ratio of 8.6 – lower than that of Archer Daniels.

Like Archer Daniels, Bunge is exposed to falling soft commodity prices, in particular, sugar. However, unlike Archer Daniels, Bunge is set to benefit from the low price. Bunge turns sugar into Ethanol and the low sugar price means that Bunge is able to pocket record profits thanks to widening profit margins.

Indeed, Bunge Ltd (NYSE:BG)’s sugar and biotechnology division accounted for 7.6% of sales last year and reported EBIT of $23 million, compared with a loss of $33 million the year before.

Record low sugar prices and weakness across the rest of the soft-commodity market boosted Bunge’s cash generation in the fourth quarter of 2012 to approximately $2.4 billion, up from $1.3 billion in the same period last year.

Conclusion

Overall, the disposal of Archer Daniels Midland Company (NYSE:ADM)’s cocoa division does improve the company’s profile and removes exposure to the depressed cocoa processing market. That said, the company’s close competitor Bunge, appears to be trading at a lower valuation and is making money off the back of depressed soft commodity prices. So, while Archer Daniels looks more attractive after its disposal, perhaps Bunge is a better choice.

The article Does the Disposal of its Cocoa Division Make Archer Daniels a Buy? originally appeared on Fool.com and is written by Rupert Hargreaves.

Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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