Archer Daniels Midland: Good Buy on Rising Commodities and Clean Energy

| About: Archer Daniels (ADM)

Archer Daniels Midland Co (NYSE:ADM) has recently climbed back to its pre-recession price, and with the rising global commodities prices, there is still plenty of room to run. ADM grows, processes, transports, and distributes a range of products. Their big four are corn, wheat, oilseeds, and cocoa and these ultimately get used as the essential ingredients in a plethora of common food choices, clean energy use, livestock feed, or for industrial use.

Just over two weeks removed from ADM’s last earnings report, where they announced an increase in earnings of 30% YoY, ADM has jumped over 13% in price. This was their first quarter to break $1 EPS since the first quarter of 2009. Looking at the graph below, you can clearly see an upward trend in both revenue and EPS, disregarding the large Q1 09’ spike.

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However, their price-to-earnings is at a measly 12. This is fairly average in an industry like this, but one could certainly make the argument for higher valuations given that quarterly revenue has doubled over the last 4 or 5 years. Their forward P/E is only 10.7.

Now, what has driven this besides the end of a terrible recession? Well, apparently America has been exporting beef like nobody’s business recently, and of course we’re still eating, probably more than any other country, be it in restaurants or at home. Additionally, live cattle prices are up about 10% since November. This means that the demand for livestock feed is up as well, an ADM specialty. Feeder cattle and pork bellies are also up piling onto the demand.

ADM is also involved in the clean energy initiative and as mentioned one of their biggest products is corn. In fact their stock price has a 0.332 correlation with the cost of corn. They are a major producer of both biodiesel and ethanol. I am no expert on the topic of clean energy, but here is a snippet from ADM’s webpage:

ADM makes ethanol from corn through an efficient process that also produces large amounts of animal feed. In addition, we are working both independently and in partnership with other leading companies and research institutions to develop next-generation biofuels made from cellulosic sources.

Below is a graph of the price of corn over the last few months. As you can see there has been a significant rise, to the tune of 34%. Basic economics would tell that there has either been an increase in the demand for corn, that the supply of corn has gone down, or some combination of the two. This has mainly been influenced by the Chinese demand for corn; it appears that they are doing big things over there. On the home front, recent supply could certainly have affected by the string of winter storms we have been having and this combined with the threat of rising gas prices could put a damper on next quarter’s earnings.

Now let us look at ADM as a stock. As stated, they have been on a 13% run since their earnings have come out but their P/E is still relatively low at 12. Their dividend has been rising each year, but generally only by a penny. This leaves their yield at 1.8%, nothing special but worth noting. If their dividend growth rate were to remain relatively constant (around 6 or 7%) I would expect the stock price to rise faster, thereby decreasing the yield.

Above is a 1 year chart and you can see the affect that the earnings call on February 1st had. Wednesday, two firms upped their price targets on the stock to $40 and $44. There are now 10 buys on the stock, with 3 holds, and zero sells. The aggregate price target as of the 16th was $41. One should notice that that only leaves a roughly 10% upside, not including the dividend. But this roughly drawn trend channel shows that you may be able to pick it up at $36, and with looming inflation and rising commodities costs, this is a stock that will offer some risk aversion for the near future, while betting on clean energy in the long run.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.