In an earlier article here, I described why fears at Bunge (BG) and Archer Daniels Midland (ADM) warranted staying on the sidelines. Since then, the stocks have fallen by 13.4% and 7.5%, respectively, while the Dow Jones gained by 10.2%. I continue to remain reserved on the two firms and expect outperformance by BRF-Brasil Foods (BRFS), a sentiment shared by the Street.
From a multiples perspective, ADM is the cheapest of the three. It trades at a respective 9x and 8.8x past and forward earnings with the highest dividend yield at 2.4%. Bunge and BRF Brasil Foods trades at a respective 9.2x and 19x past earnings. ADM and Bunge are still rated a "hold," while BRF Brasil is rated a "buy." The emerging market focus, however, merits bullish expectations about BRF Brasil.
At the second quarter earnings call, ADM's CEO noted struggling conditions:
We reported second quarter net earnings of $80 million or $0.12 per share on a fully diluted basis. Our adjusted EPS was $0.51 and that would exclude LIFO and the impairment charges we took this quarter related to our Bioplastics business. Segment operating profit when excluding the impact of the impairment charges was $648 million.
It was a tough quarter, particularly for comparisons. Last year's segment operating profit was a record. And this quarter, we took our asset impairment charges on PHA. And the operating environment was challenging. Ongoing weakness in global oilseeds margins, lower results in corn and poor international merchandising results hurt our second quarter profits.
We remain optimistic about the long-term fundamentals of our business and the growing earnings power of our company.
The firm is now scaling back on supply and reducing labor. It recently cut 1,000 jobs from its workforce, most of them salaried workers. I anticipate the ag market to continue to be volatile, given uncertainty in consumer expenditures. On the other hand, ADM has done well to address margin issues.
Consensus estimates for ADM's EPS forecast that it will decline by 21% to $2.74 in 2012 and then grow by 17.5% and 8.4% in the following two years. Assuming a multiple of 10.5x and a conservative 2013 EPS of $3.17, the rough intrinsic value for the stock is $33.29, implying 12.7% upside.
If weak results at Cargill are any indication, Bunge will be releasing disappointing performance in the fourth quarter earnings call. Management nevertheless remains optimistic about a rebound based on improving domestic harvest trends. But given the gap between grain futures and the economic equilibrium point, investors are rightfully doubtful. Oilseed crush margins have further fallen due to poor domestic demand for soybean mean and industry surpluses. With that said, ROIC is trending upwards by around 134 bps to 7.2% in 2013 while net debt is trimmed by around $1B (25% of current leverage). Management has showcased confidence by planting 50M hectares of new land.
Consensus estimates for Bunge's EPS forecast that it will grow by 42.6% to $5.89 in 2011 and then by 13.4% and 7.6% in the following two years. Assuming a multiple of 10.5x and a conservative 2012 EPS of $6.58, implying 19.3% upside. If the multiple drops slightly to 9x and 2012 EPS turns out to be 4.7% below consensus, the stock would still be roughly at fair value.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
