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Archer Daniels Midland (NYSE:ADM) procures, transports, stores, processes, and merchandises agricultural commodities and products. The company's products are primarily for two end-uses, including food or feed ingredients.

As one of the world's leading agricultural processors, Archer Daniels will be a protective stock in case of a recession due to its stable activity that is focused on primary needs. With a worldwide transportation network in more than 265 locations, ADM has a presence in almost every part of the globe (more than 75 countries). Nevertheless, its main market remains the US, representing 53% of Global Sales.

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ADM US EQUITY

Price

Distance

Total Debt

23.355

Target

70,00

117,59%

Total Assets

42.193

Long Entry Price

32,17

Debt Ratio

55%

Stop Loss

9,00

-72,02%

Residual Value

14.431

Actual

Target

QT

Mkt Cap

Pr

Variation

QT

Mkt Cap

Pr

Variation

MKT CAP

659

21.185

32,17

MKT CAP

659

46.097

70,00

Residual VALUE

659

14.431

21,91

-32%

Residual VALUE

659

14.431

21,91

-69%

Better

Worst

Better

Worst

Net Income

2.036

1.320

Net Income

2.036

1.320

Mkt Cap

21.185

21.185

Mkt Cap

46.097

46.097

PER

10,41

16,05

PER

22,64

34,92

The company's balance sheet shows some financial soundness, with a debt ratio of 55%, book value per share of $27.81 and debt interest rate at around 2%.

In the event of a new recession, shareholders can count on the stock, which has a dividend yield of 2% a year. I said 'count' because this company has paid their dividend quarter after quarter without interruptions for the last 80 years. Even in the case of liquidation, its residual value is $14.431 million, which means a possible depreciationof 32% for shareholders, offering some confidence to long-term investors.

In terms of revenues, the average growth rate for the last five years is 19% a year, which is a good performance in view of the volatility in commodities prices in the last five years. On the last fiscal year, ADM posted a 30% increase in sales due to the rise of commodities, in part because of QE2.

After observing the evolution in margins, we conclude that this increase in sales was followed by a rise on the cost of revenues caused by higher commodities prices - which ADM has been able to transpose some of to its clients; even so, the EBITDA margin at 4.42% are at near the lows of the last 20 years.

Conclusions

Positives:

  • This stock is a good investment in a recession situation being, as its main activity focus is agricultural, which is a basic need.
  • The main Market is North America, one of the biggest food consumers per capita in the world.
  • It has a stable net income and dividend.
  • In case of bankruptcy, its residual value is only 32% below the actual market cap.
  • It has good growth potential in terms of activity, which can be favorable in case of high inflation.
  • Even if it double its price, the actual PER would still be at near 20, which is better than a 20-year Treasury yield of 1.79% (investing $100 receiving 1.79% a year capitalized for the next 20 years will get $172.04). Therefore, the potential of investing in ADM is far greater than investing in US Treasuries and equally secured.

Negatives:

  • There is the risk of overly fast increases in the market prices for agricultural commodities, which may pose difficulties for ADM in passing on the increases to its final costumers without lowering its margins or losing its competitiveness.
  • In terms of geographic positioning, it should be more focused on China, which has a big market for basic products, such as agricultural.
  • In 2008, ADM's stock price on the NYSE suffered a depreciation of 72.13% from its high ($45.42) to its low ($12.66), reflecting a high sensitivity to the overall market - which can be confirmed by the beta of 1.02 relative to the S&P500.

Source: Archer Daniels Midland: Buy Stability In The Agricultural Business