Archer-Daniels-Midland: Deep Value Play In Agriculture

| About: Archer Daniels (ADM)

Food supply & agriculture are two of my favorite industries for long-term holdings, as a shortage of basic commodities is expected to arrive side-by-side with the world's population growth.

Archer-Daniels-Midland Company (NYSE:ADM) is one of the world's leading agricultural processors. The company operates in several segments:

  1. Oilseed processing - process several seed types (soybeans, cottonseed and others) into vegetable oils and protein meals for food, feed, energy and other industrial products.
  2. Corn processing - mainly from the U.S., this segment is involved in wet and dry corn milling activities to produce ingredients used in the food and beverage industry including syrup, starch, glucose, dextrose, sweeteners, ethanol, amino acids and other by-products.
  3. Agricultural services - engaged in buying, storing, cleaning and transporting agricultural commodities and reselling them primarily as food and feed ingredients or as raw materials, for the agricultural processing industry.
  4. Other services & products - consists mainly of wheat and cocoa processing and financing activities.

ADM operates its complex supply chain globally: headquartered in Illinois, its 30,000 employees operate in 75 countries across 6 continents. They use their 264 processing plants and 397 procurement facilities that are spread mainly around North & South America, Europe and Asia to support their global growth plans and to better face economic downturns.

Trying to put it simple, ADM grows or buys the raw crops, transports them as necessary between countries and facilities for processing, transforms them into the desired value added product, and then sells them to the customers around the globe. Since ADM is highly exposed to changes in the prices of the commodities it deals with - on both sides, as a buyer and a seller, the risk is actually inherently somewhat reduced. Add to that a strict risk management policy and you get a decent protection during the recent volatile years.

Additionally, in order to meet future trends and needs, ADM acts in several ways:

  1. It constantly expands its product portfolio.
  2. It invests in new plants around the globe, to expand future growing and processing capacities.
  3. It constantly seeks ways to operate cheaper and more efficiently - in deploying new techniques to grow the raw crops, to process them and to transport them.
  4. It enters joint ventures with local distributors in new and emerging markets. An example is the 16% investment in Wilmar, Asia's largest agricultural processor.

Some metrics:

  • ADM is a dividend aristocrat - has increased its dividend consistently through the last 36 years. During the last 11 years it has increased 11.8% per year on average.
  • The payout ratio, however, is quite low at 19%.
  • Dividend yield: 2.33%, somewhat low but considering the dividend history and payout ratio - there is room for future dividend growth.
  • PEG: 1.16, P/B: 1.07, indicating current stock price is not high.
  • Current ratio - 1.88, indicating ability to finance short-term needs well. The company was able to issue equity and debt recently, not something to be ignored in the current markets.
  • Projected annual growth for the next 5 years: 8.4%.
  • Market cap: $20 billion, total liabilities are $23 billion while current assets+ LT investments and fixed assets are $40.4 billion. Additionally, free cash flow for the last 9 months was $2.8 billion. These numbers, if can be repeated (not to mention increased as management plans...), indicate deep value.
  • The last annual report showed deep negative free cash flow. The reason was dramatic growth in working capital due to rising commodities costs that resulted in inventories and customers balances rising much more than payables.
  • During the last 3 volatile years ADM made it to raise EPS every year, from $2.62 to $3.13.

The table below provides a short comparison of the basic parameters for ADM and other competitors:

Archer-Daniels-Midland Company Bunge Limited (NYSE:BG) Corn Products International, In (CPO) Tyson Foods, Inc. Common Stock (NYSE:TSN) Syngenta AG (NYSE:SYT)
Market Cap $20 billion $8.5 billion $4.16 billion $7.1 billion $28.6 billion
P/B 1.07 0.77 2.00 1.28 3.35
PEG 1.16 1.00 1.16 1.27 2.44
Dividend Yield 2.33% 1.7% 1.5% 0.8% 2.5%
Payout Ratio 19% 15% 13% 8% 31%
Projected Annual Growth - 5 Years 8.4% 10% 10% 7.33% 7.5%

While commodities have been extremely volatile and potentially risky during the last few years, I believe ADM's current stock price reflects a deep value opportunity in the agriculture industry for the long-term.

This world leader's combination of global spread, investments in future growth, cautious risk management, current valuation and dividend growth history are simply too difficult for me to ignore or pass.

Disclosure: I am long ADM.