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Recently Archer Daniels Midland (NYSE:ADM) warned on its current quarter that its grain handling segment profit is running below the projected $150-$200 million estimate. The euro debt problem is causing a challenging environment, supplies of crops are at low levels, and ethanol margins have declined to the high negative twenty cents from the thirteen to fifteen cent range.

Since this announcement ADM has declined about 8%, some of which is due to the general market malaise because of the eurozone fears. This has made ADM very appealing. ADM is now yielding 2.4%, the P/E ratio is still a reasonable 14.46, the forward P/E is now under 10 at 9.32 and the price-to-book ratio stands at 1.09. A number of models suggest significant upside could be had to patient investors.

The residual earnings model has a target price of $45.13. That is potential upside of 56.8%.

Net Tangible Assets$17,386,000,000.00
Earnings $2.56$3.09$3.46$3.87$4.33
Dividends $0.70$0.74$0.78$0.82$0.86
Earnings Growth 20.70%11.97%11.85%11.89%
Book Value/per share$26.40$28.26$30.61$33.29$36.34$39.81
ROCE 9.70%10.93%11.30%11.62%11.91%
CAPM (discount rate) 7.11%7.11%7.11%7.11%7.11%
Residual Earnings $0.68$1.08$1.28$1.50$1.75
P/B Ratio1.111.040.960.880.810.74
Book Value/per share (previous year) $26.40 CAPM
PV Residual Earnings (current year) $0.64 Risk-Free Rate/WACC4.2238%
PV Residual Earnings (current year + 1) $1.02 Avg. Return of S&P50010.00%
PV Residual Earnings (current year + 2) $1.72 Market-Risk Premium5.78%
PV Residual Earnings (current year + 3) $3.87 Beta0.5
PV Residual Earnings (current year + 4) $11.49 CAPM7.11%
5 Year Target Price $45.13

The Graham number shows a very close target price to the residual earnings model of $45.40. That is a potential gain of 57.7%.

The Graham Number
Diluted EPS of previous year3.47

The dividend discount model, which conservatively projects a dividend increase of 4 cents a year, based on recent ADM dividend history suggests a target price of $54.84. That is a potential gain of 90.5%.

Required Rate of Return7.11%7.11%7.11%7.11%7.11%
Dividend Growth 5.71%5.41%5.13%4.88%
Present Value$9.84$10.41$10.97$11.53$12.09
Price Target$54.84

Recent action suggest panic in the overall markets and overdone selling in ADM. For a company that has had a long and storied history, a steady dividend that investors can compound, which is not factored into any models, and products and services that people need in all economic climates I would feel comfortable initiating, or adding to, a long-term position at these levels.

Source: Use Current Weakness To Buy Archer Daniels Midland