Archer Daniels Midland (NYSE:ADM) has been gaining notorious prime time publicity in Australia, over its attempted takeover of GrainCorp (OTCPK:GRCLF), an ASX listed company encompassing one of the world's largest grain storage and logistical networks with storage capacities of up to 20 million tones, a network aligned with rail and road, and a strategic set of ports for export markets. ADM already has a 19.8% stake in GrainCorp. The takeover, worth AUD3.4bn (US$3.1bn), has been gaining publicity for all of the wrong reasons in Australia. Some Australians believe that this is a foreign takeover to a vital element of food security with no concern to local farmers, and that this transaction poses a risk of monopolizing the grain trading sector in Australia, pushing locals out of business and pushing local grain prices up. ADM on the other hand seems to be seeking a lasting mend for revenue growth by this acquisition.
Right now the decision to allow or not the takeover is with the Australian treasurer and the Foreign Investment Review Board. With GrainCorp netting AUD175mn(US$160mn) and AUD205mn (US$188mn) in 2013 and 2012 respectively, gaining access to what is now seen as Asia's food basket, and being part of Australia's lucrative agri-business, in the long run this transaction will potentially brighten ADM's financials.. that is if it happens.
ADM is a very well diversified agri-business geographically (in the US only) and by the products and services it provides, this investment will only add to that. It is hard not to believe that this is not a strategic acquisition with more ANZ (Australia and New Zealand) or possibly Asia Pacific investments in the horizon following this takeover, with the Asian markets as the target consumers. One of ADM's counterparts, Agrium (NYSE:AGU), has already proceeded with such a strategic transaction. Agrium has acquired a controlling stake in Landmark, an Australian unlisted leader in agribusiness products and services. Following this less publicized takeover, Landmark has been very quietly and actively acquiring farms, competitors, and the like in Australia.
The future potential benefits of investing in Australian agri-business are strong; for example, Australia's population stands at around 22.7 million currently, and the forecasted 2013 wheat production is expected to be around 24 million tons, that's more than a ton of wheat per person per year, and the statistics are staggering in other foods. With neighbors with a hungry appetite, agri-business in Australia has strong market fundamentals. And GrainCorp is the last of a group of large listed Australian agri-business players up for grabs.
ADM is a market leader with a market cap of $27.1bn, almost triple that of its closest competitor Bunge Ltd (NYSE:BG), and with steady returns it is a good stock to be part of any portfolio. Keep in mind ADM does not have a listed direct competitor over all its products and services. That said ADM does suffer from low margins (5.4% gross and 3.1% net margins on a 5yr average) and with no improvement in these margins expected in the foreseeable future, ADM will have to rely on revenue growth for greater profits. ADM's revenue growth was flat in 2012 at 10.4% compared with 2011's 30.8% and its 5yr average of 17.6%. This transaction might be a long term fix for this problem, with GrainCorp as ADM's anchor in ANZ and further acquisitions to follow in the region, with the Asian export markets as the main consumers. GrainCorp is a well established and managed business, and its management with some US entrepreneurship will be able to strategically grow, and grow ADM's revenues, through greater geographical diversification and more revenue sources.
This is not a risky stock but one for the long haul; with a beta of 1.17, it is expected to outperform the market, if the market performs, as a beta of 1 moves accordingly with the market, while a beta greater than 1 moves greater by that rate in the same direction. If the market does not perform, ADM is expected not to perform, in theory.
ADM's EV stands at $30.6bn less than its market cap of $27.1bn, being currently undervalued by 12.9% if using EV as a measure. Being undervalued does make ADM an attractive investment, but how does ADM compare to its peers? BG is undervalued by 53.1%, Tyson Foods (NYSE:TSN) by 14.1%, Ingredion Incorporated (NYSE:INGR) by 21.4% when market cap is compared to EV. ADM is the least undervalued firm compared to its peers but BG is incurring losses and both TSN and INGR are smaller businesses. With a P/E of 18.53 ADM has the highest P/E when compared to its peers (that are generating income), with TSN at 14.90 and INGR at 13.59 (industry average of 14.45). ADM is valued higher when comparing EV to market cap and by P/E to its peers, by a premium most likely attritubted to it being the listed market leader. Taking all these factors into consideration it seems that ADM might not be the most attractive stock in this industry but ADM is the market leader, currently generating profits, and with strong growth prospects on the horizon, it appears to be a strong stock to have in a portfolio.
One notable risk that ADM might be susceptible to is commodity related risk, as all commodity involved firms would endure. ADM's revenue generation revolves around corn, oilseeds, wheat, and cocoa. A bad crop year was one of the reasons for the 2012 revenue dip in growth. A below par crop year is a real risk and could be due to drought, extreme weather, and/or disease that would result in drops in revenue. Unlike Agrium, Monsanto (NYSE:MON), and Potash Corp. of Saskatchewan (NYSE:POT) (companies involved in fertilizer, seeds, and pesticides but part of the agri-industry), these companies perform better when crop yields are not up to requirements, as farmers turn to them for yield enhancers. So to diversify against commodity risk, entering the yield-enhancing sector would hedge against such a risk. But the fertilizer sector is also currently suffering from low margins due to raw material prices and acquisitions in this sector unlikely by ADM. Our focus should shift to the commodity outlook. Agricultural production expectations have a large impact on prices. Production is expected to exceed consumption for both wheat and corn, creating expectations of weakening prices in the short term. Expectations are neutral for the longer term as consumption is expected to increase, mainly derived from the Asian markets. GrainCorp has all the infrastructure and systems in place to make such an option possible. In essence it is expected that businesses that sell such commodities will be able to sell more, mainly to the Asian markets, generating more revenue in the long term.
One note to consider for an upside, is ADM's large involvement in corn processing dedicated to ethanol production. If ethanol does pick up as a major source of energy in the future, ADM will most likely be able to reap large profits.
This is a stock that is consistent but not remarkably profitable, delivering over the years constant dividend returns, with dividends growing 8.57% in 2013. ADM's management appears to want to keep it that way, by guaranteeing growth in revenue to maintain the status quo. So it appears ADM's strategic market is shifting down under, that is if it happens.