In an earlier article here, I opposed the Wall Street outlook that Archer Daniels Midland (ADM) is a "hold" while Bunge Limited (BG). My position was that the reverse was more accurate. Since I first asserted this, ADM has indeed outperformed Bunge by nearly 400 basis points at a return of 3.7%. This was a respectable amount of appreciation given the uncertainty in agriculture, especially in regards to commodity volatility and margin trends. The Street has now pushed down Bunge on par with its larger competitor at a "hold". I share this general sentiment.
From a multiples perspective, ADM is the cheaper of the two. It trades at a respective 8.9x and 8.6x past and forward earnings while Bunge trades at a respective 9.3x and 8.7x past and forward earnings. In addition, ADM is the much safer of the two with a dividend that is around 70 bps higher at 2.4% and a beta less than half of its competitor. With both trading at the low-end of peers, the chances are skewed more towards multiples expansion than contraction. A forward PE of around 8.6 is much too low given that the market has already accounted for much of the obvious risks. Consider, for example, that Corn Products (CPO) trades at 11.1x past earnings and is much smaller, less capable of weathering a double dip.
At the third quarter earnings call, Bunge Limited's CEO, Alberto Weisser, noted reasons to be optimistic amidst disappointing results:
"It was a difficult quarter with lower results in all segments except Fertilizer. This particular volatile period was marked by significant price movements and a combination of external factors that resulted in markets moving at times differently than underlying fundamentals. Managing risk in our agribusiness and sugar & bioenergy segments in this environment proved to be challenging. Lower than planned sugar milling volume, due to the impact of adverse weather conditions in each of the past 2 seasons on our sugarcane yield, also weighed on our results. However, looking forward, we expect results to improve in the fourth quarter and see optimistic signs for Bunge in 2012.
While the global macroeconomic environment presents uncertainties, there are reasons to expect resilience in our businesses. First, many of our products are basic staples needed to feed the world's growing population. USDA forecast that demand for global soybean meal and vegetable oil will increase by 5% and 4%, respectively. In fact, global vegetable oil consumption has increased for 31 straight years. Second, global commodity stocks-to-use ratios remain relatively tight, particularly in feed grains and vegetable oils".
As is true in almost anything green, margins are always going to be problematic. With that said, soybean processing margins are overly low and with utilization at around 80%, it is imperative that supply be scaled back. Domestic stagnation is proving relentless, creating a high weighted average of capital for Oilseed Processing. While trends in European sunseed processing and corn exports to Asia provide some reason to be optimistic, by and large, the demand is just not there. Going forward, I anticipate a relatively soft fourth quarter.
Consensus estimates for Bunge's EPS forecast that it will decelerate: 43.1% growth to $5.91 in 2011 and then 13.4% and 7.5% more in the following two years. Assuming a multiple of 10.5x and a conservative 2012 EPS of $6.54, the rough intrinsic value of the stock is $68.67, implying 16.9% upside. If the multiple were to decline to 8x and 2012 EPS turns out to be 6.1% below consensus, the stock would decline by 14.3%. This is not the most favorable risk/reward and warrants holding out until macro trends improve.
Ditto for ADM, despite my expectations for continued industry outperformance. The company is taking the necessary steps of scaling back supply by cutting jobs to the tune of around 1K lately - most of which are salaried. With poor first quarter results highlighting just how volatile the ag market is right now, it is redeeming to see the market address margin issues. Going forward, it would be well if management shifted their business mix more towards services where it is showcasing higher capital productivity.
Consensus estimates for ADM's EPS forecast that it will decline by 14.4% to $2.97 in 2012 and then grow by 13.1% and 5.4% in the following two years. Assuming a multiple of 10.5x and a conservative 2013 EPS of $3.25, the rough intrinsic value of the stock is $34.13, implying 18% upside. If the multiple were to decline to 8x and 2013 EPS turns out to be 10.7% below consensus, the stock would decline by 17%. While the margin could expand to as much as 15x given inflated comparable, the weak business environment sure makes the sidelines attractive.