Archer Daniels Midland (ADM) is the McDonald's (major industrial corporation) of the Old MacDonald business (farming). ADM's market cap is close to $24B and its Q2 2013 revenue was $22.5B (financials obtained from gurufocus.com other information from ADM annual reports). ADM is a global food-processing and commodity trading company. It is not an exciting industry, but it is a necessary one.
ADM operates in three main segments - Oilseeds Processing, Corn Processing and Agricultural Services. Most of the revenue in each of these segments is generated by turning crops (corn, soy beans, etc) into products (ethanol, high fructose corn syrup, soy proteins, etc). These are somewhat complicated processes that all but the very largest farm business would be unable to do for themselves. ADM is boring but necessary which is exactly the kind of business that can generate consistent and ongoing profits. ADM is a very well established company with a dominant position in agri-business. For example, ADM is the largest corn processor in the world and corn is the number one crop in the world.
Human beings have been farming since the dawn of civilization, so it is not the kind of business where you will see revolutionary changes. This means that money must be made with incremental improvements. ADM has a good track record of delivering these. In fiscal year 2012.5 ADM freed up a billion dollars of cash through inventory reductions, sales of non-core assets, and reducing collateral requirements on borrowings (unless otherwise specified, all numbers in this article are from ADM reports and investor presentations). ADM continued these improvements into H1 2013 and freed up another billion dollars. The very existence of a fiscal year 2012.5 is another example of the kind of incremental improvements ADM delivers. 2012.5 is a half year reporting period that allows it to synchronize future reporting years with the tax and regulatory year. This will save time and money.
Agriculture is a fundamental part of the economy and will always be - at least until science finds a method for human beings to perform photosynthesis (and even then corn has all sorts of industrial uses). ADM's middleman position provides diluted exposure to this important sector in the same way that owning a gold miner provides exposure to the price of gold. The relatively non-cyclical nature of agriculture makes ADM a good defensive stock (its beta is just 0.41) and as I mentioned in Boring is Good, low beta stocks tend to outperform the market in the long run. ADM is well diversified geographically, by crop, and in the services it provides. This helps ensure stability which makes long-term planning and improvements easier.
ADM has suffered a difficult business climate over the last couple of years - due in large part to the actual climate). Poor weather caused lower production (and therefore higher prices) for most of ADM's inputs (the corn etc they processed) left the mills with spare capacity. However, this is good news for investors now as ADM had the balance sheet strength to weather this challenging period and is poised to generate increased revenue if and when farming production and commodity prices improve.
Another possible source of upside is ADM's domination of the ethanol market (about 43% of the US market). If the US moves further toward increased ethanol in fuel (either due to eco-friendly legislation or rising oil prices) then ADM is ideally placed to benefit. This would be a much smaller impact than the kind of massive improvement that smaller or more focused companies would enjoy but it is still nice.
But what about the financials?
ADM has been growing revenue fairly consistently for the last ten years. There was one dip (of about 12%) in 2010 but it grew from $30.7B in 2003 to $89B in 2012 which is an 13% annualized growth rate. The worry is that revenue growth has been slowing. It was just 5.8% over the last five years and revenue is flat for Q2 2013 vs 2012. The last couple of years have been tough on ADM because difficult farming conditions have meant its processing plants have been operating at less than full capacity. ADM's largest listed competitor - Bungee (BG) - shows a very similar pattern. The BG revenue dip occurred in the 2009 reporting period but BG reports in the December reporting year while ADM was reporting in June.
ADM's Return on Equity was just 6.8% in 2012 and has been declining since 2007 (19.2%). It has not been this low since 2003. Return on assets was a mere 2.9%. This actually compares favorably to BG (0.6% return on equity and just 0.2% on assets). ADM has been reducing debt which is good for long term strength (especially if you believe interest rates must rise sometime soon) but means shareholders lose some of the benefits of leverage.
Not surprisingly, after seeing the above numbers, margins are very low. Gross margin was 4.1% in 2012 and has never been above 8.1% in the last ten years. Net margin was a very slender 1.4% (10-year high was 4.9%). ADM is again slightly better than BG (4.0% and 0.9%). The agricultural processing business is not very lucrative in this light, but its strength is its consistency. - ADM is a boring but necessary company so it will always take their small slice of the agricultural profit pie.
The dividend yield is currently on the low side at 2.0%. However, ADM has paid dividends since 1927 and have increased its dividends for each of the last 37 years. The dividend grew 6.6% last year and at an average of 8.4% p.a. over the last 5 years. This is attractive to anyone who wants a nice stable source of income. The payout ratio is consistently below 40% which is another good sign for future safety and growth. Even if we assume zero earnings growth ADM could theoretically increase its dividend 6.6% a year for the next 15 years before it is no longer covered. This should produce a nice income for those who hold the shares and the possibility for capital gains when the yield becomes too attractive to ignore. The history of noticeable dividend increases is good and goes some way to making up for the low yield. ADM is a safe dividend stock but at the moment you are paying a premium for that safety. If we look at the yield history, we can see that 2.0% is lower than the yield has been for most of the last two years (it traded as high as 2.82% on November 12th 2012). This suggests that there may be some room to wait for pullbacks.
Overall, ADM is a very safe stock and it offers a reasonable dividend yield with a very good history of increases. Management seems sound and they are in a very reliable business. While profit margins and return on capital are low they are consistent. ADM looks to be a very safe stock for investors who can tolerate the low yield and slow growth prospects.