By Matt Doiron
The largest corn processor in the world, Archer Daniels Midland (ADM), disappointed the Street this morning by reporting earnings per share of 43 cents (38 cents when an inventory credit was excluded). Sell-side analysts had expected that ADM would match its earnings from the same quarter the previous year- 58 cents per share- but the company's announcement has sent the stock down about 4% today, and the stock is down about 10% this year. We tracked some insider selling at ADM earlier this year, which might have served as a signal to investors that the company could struggle to maintain its stock price (find other articles about insider trading).
The bad news from ADM wasn't limited to the poor financial results, but extended to concerns about the company's future earnings. Drought conditions have reduced forecasts for U.S. corn harvests, and corn prices recently hit a record price above $8.20 per bushel. ADM also processes corn into ethanol, and due to the rising cost of corn this business activity has been taking operating losses. While corn prices may come down, the combination of low supply and high prices should continue to impact ADM's earnings over the next few quarters. With the decline today ADM trades at 13 times trailing earnings and 9 times its earnings for the next year, and is right at its book value.
Adage Capital Management, co-managed by two alumni of Harvard Management, owned 2.4 million shares of ADM at the end of March, nearly doubling its position since the beginning of 2012. Adage likely bought into ADM to gain more exposure to the food industry. We covered Harvard Management director Jane Mendillo's remarks at the Delivering Alpha Conference in which she recommended natural resource stocks including timber, oil, water, and food. Cliff Asness' AQR Capital Management was another holder of the stock, nearly tripling its position to 1.1 million shares. Billionaire Steve Cohen is also among ADM shareholders (see Cohen's top picks). As these managers likely anticipated, corn prices have risen- but due more to low supply than high demand.
ADM's closest publicly traded comparable is Bunge (BG), which is also an agribusiness company though it does not have as much exposure to corn as ADM. Bunge has actually risen over 10% this year despite missing earnings for two quarters in a row. It currently trades at very similar earnings multiples to ADM, though again it has less downside from any continuing low supply of corn and less upside if next year's harvest is much more successful. Bunge trades at just below the book value of its equity with a price/book multiple of 0.9, and its dividend yield of 1.7% is slightly below ADM's 2.5%; in both of these cases it seems narrowly more attractive than ADM.
Two other large cap companies with agriculture exposure are Potash Corp of Saskatchewan (POT) and Mosaic (MOS), which produce fertilizer for the agricultural industry. These companies pay dividend yields at about the same level as Bunge and trade at 15 and 13 times trailing earnings, respectively. Both reported substantial decreases in net income in their most recent quarter compared to a year ago and have fallen 15-20% over the last year. We look at these peers and don't see ADM as a buy, getting into the stock is a bet on improvements in the weather and even assuming that case it does not look undervalued.