Don’t Miss Out on this Ag Stock

We like playing long-term secular trends, and one of the major ones of our lifetimes is the population increase and associated need for increased agricultural output. Archer Daniels Midland (NYSE:ADM) is a leader in the global diversified agriculture markets that procures, processes, and markets a variety of agricultural products. It also happens to be and is also one of the largest processors of oilseeds, corn, wheat, and cocoa; main products are soybean oil and soybean meal, high fructose corn syrup (HFCS), ethanol, and cocoa products. We think from a business and valuation standpoint, ADM shares provide a compelling opportunity for investors looking to gain exposure to this trend. Billionaire Ken Griffin boosted his holdings in ADM by 6% during the first quarter. Robert Bishop, Tom Gayner, and Richard Schimel initiated brand new positions in the stock as well.

Archer Daniels Midland Company (NYSE:ADM)

There are a few key drivers that we outline below that make ADM compelling to us:

Oilseeds stand to benefit from favorable supply/demand dynamics in North America and South America. In Q3 we saw tight supply in South America, driving stronger North American crush demand, which we expect will serve as a tailwind into 2013 as US crops are harvested. We think that higher oilseeds processing will drive segment growth; crushing and origination profits increased substantially by $75 million from $700 million to $775 million. The company posited that South American supply would be down 15%, which will help out North American crushers as demand shifts from South America to North America.  We also think good South American crop margins bode well for similar trends in FY 2013. Structurally, supply/demand has been improving; over the last three and a half years, six crush plants have been idled and demand for soybean meal is estimated to grow 3.5% this year according to the USDA.

We believe that ethanol fundamentals have hit the trough. Due to unprofitability, many plants have been closed. As excess plants are closed, corn demand will increase as it becomes harder to obtain, so this summer, we would expect to see demand and supply moving toward a more balanced dynamic. We see ethanol concerns as largely unwarranted as the absence of a blenders’ tax credit will not materially impact demand. Where ADM stands to weather the ethanol situation well, competitor Bunge (NYSE: BG) is more of a mixed bag for us. The company’s sugar/bioenergy business has run into some challenges. Progress has not gone according to plan, and the division still operates at a net loss not to mention that volumes have been depressed. Management revised guidance for volume of sugar processing downward, indicative of weak fundamentals in that industry. Then bioenergy side is mostly ethanol. The drop in the blending ceiling has hurt prices and has undercut margins in future contracts the company strikes. Though the company views this as a one-off event, we are not so certain since those fixed price contracts will be just as vulnerable now as in the near-term in the face of volatility. BG’s agribusiness division continues to do well, but we think the sugar/bioenergy business will serve as an overhang on the stock.

ADM further has restructuring initiatives ahead of it that should result in savings and additional funds for share repurchases. ADM has indicated that it intend to both improve capital returns to shareholders. We see no reason for any change in its progress in executing on these initiatives. ADM expects the cost savings to ultimately reach $125 million next year, which was revised upward by the company.

With the momentum coming off Q3 results, we think FY 2013 EPS is on-track to exceed $3 per share even in the face of any headwinds from oilseeds and ethanol. We believe ADM shares are undervalued, trading at less than 11.0x 2013 earnings (historical forward multiple is ~14.0x). Additionally, ADM trades at ~1.2x tangible book value (historical average is 1.6x). Given several potential catalysts like E15 implementation, normalization of ethanol inventories, and protein production (demand for protein meal), coupled with strong EPS growth, we think it is reasonable that the shares should revert to historical tangible book levels.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!