Getting Richer With Archer

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About: Archer-Daniels-Midland Company (ADM)
by: Stock Market Arbitrage
Summary

Archer-Daniels-Midland continued to lavish investors with increasing dividend payments.

The company further strengthened its performance as it closed FY 2018 and started 2019 with impressive values which showed its solid and intact financials.

The stock price remains undervalued despite its bullish trend.

With all its acquisitions, investments and product launching, Archer-Daniels-Midland may realize higher returns in the long run.

Archer-Daniels-Midland (ADM) remained a viable company for many investors, as it has been significantly raising its dividends throughout the years. Moreover, the company's financials showed consistency, as its Income Statement and Balance Sheet seemed to agree with one another. Nevertheless, the stock price is still relatively cheap and undervalued amidst its bullish movement.

What’s in Store for the Investors?

Dividends per Share

Investors continued to enjoy the uninterrupted success of ADM, as its earnings have been increasing over the years. Their share of profits has been rising as well. For the past 10 years, the company has been providing an average annual growth rate of 10.1%. From $0.52 per share in 2008, it slowly rose to $0.76 in 2013. In 2014, it made its biggest leap to $0.96 per share, which resulted in an increase of 26.3%, before providing another huge growth rate of 16.7% in 2015. In 2018, it distributed $1.34 per share and declared an increment of $0.06 per share. Now that the expected annualized value is $1.40 per share, larger amounts must be anticipated. Using the Dividend Growth Model, the projected values to be distributed from 2020 to 2024 are $1.47, $1.6, $1.62, $1.63 and $1.65. With respect to the company's earnings, how substantial has the dividend become?

(Taken from Nasdaq)

Dividend Payout Ratio

Generally, as ADM's earnings increased, the dividends increased as well. The good thing here is that whether there has been an increase or decrease in net income, the dividends that investors have been enjoying continued to increase significantly. From 2008 to 2011, it has been playing between 18-23%, before rising to about 30%. In 2015, it sharply rose to 55% despite the company's negative change in net income from $2.92 billion to $2.16 billion. This is not surprising at all, since the dividends have been rising. A sharp decrease in net income would result in a sharp decrease in the ratio. This just showed that the company has always been putting its investors in its priority list. Also, it could be seen that the company was able to sustain it in the following year. Currently, it is about 40-50%. The estimated amounts for the next five years showed that it would remain almost constant at 45-47%. This should be an assurance to the investors, since the company has been in existence for a long time. Also, the fact that the company remained profitable despite everything could tell about its solid fundamentals, which would be further discussed in the succeeding parts.

(Taken from Nasdaq)

The Dividend Growth Model was utilized to estimate the values for the next five years.

Dividends versus Net Income

The upward trend of the Dividend Payout Ratio could suggest that the dividends have been rising faster than net income, and vice versa. This showed the individual trend of the company’s earnings versus the amount it has been sharing with the investors. In 2015, net income decreased sharply while the dividends rose significantly, which could be seen in the graph below where the gap between the two lines became narrow. But after that year, the gap started to widen and would continue to do so for the following years.

There are two things that investors must understand and appreciate. First, the upward trend of both lines shows that both the company and the investors have been realizing earnings through the years. And as the company earned more, investors received more. Second, net income remained higher than the dividends. This means that the company could always adequately suffice its dividend payments regardless of the amount of gap. With its average amount from 2008 to the projected years, one could see that investing here would remain viable with a remaining amount of $1.12 billion after dividends, which will be added to reinvestment, expansion and dividend increase. This proves that the company has always been profitable and sustainable even in the long run.

(Taken from Nasdaq and MarketWatch)

The Dividend Growth Model and Linear Trend Analysis were utilized to estimate the values for the next five years.

Retained Earnings

As an investor may wonder how Archer-Daniels-Midland can continue sufficing the dividend payments for a long time, he may also wish to check the company's retained earnings. It has been constantly profitable by a billion, even after deducting the dividends from the bottom line earnings. But it's also important to see the company's soaring retained earnings. With an average annual growth rate of 9.6% for the last 10 years, Archer-Daniels-Midland maintained its adequacy to meet its financial obligations. From about $8 billion in 2008 and 2009, it kept rising before doubling itself after six years. Since then, it didn't slow down until it reached $18.5 billion in 2018. The forecasted values showed that it would rise to $25 and $26 billion in 2023 and 2024 respectively. Given the company's increasing net income as well as its expanding retained earnings, one must be certain of both its short- and long-term viability.

(Taken from MarketWatch)

The Linear Trend Analysis was utilized to estimate the values for the next five years.

With respect to the dividends, it could be seen that the latter didn't even touch or at least get close to the former. Even in the succeeding years, dividends would not comprise 10% of the retained earnings. The dividends kept increasing, but net income rose as well, so it could easily cover the dividends before the latter could come near ADM's retained earnings.

Furthermore, the retained earnings have been massive enough to cover even the company's outstanding payable and still could realize billions should it wish to make a one-time payment. This remains a testament to the company's intact fundamentals that, as the company continues to realize earnings, its capability to meet its long-run obligations becomes larger, which could be shown by the widening of the gap between the two.

(Taken from Nasdaq and MarketWatch)

The Dividend Growth Model and Linear Trend Analysis were utilized to estimate the values for the next five years.

Delving into Archer's Fundamentals

Operating Revenue

When it seemed that the sales would continue to decline further, Archer-Daniels-Midland made a comeback as 2018 closed with 3.3% revenue growth. From its decreasing trend in 2013 at $89 billion to $60 billion in 2017, the company realized a higher value of $64 billion in 2018. Though the operating revenue remained lower than the other years, it was still a huge success for ADM for ending its losing streak. The downward trend was primarily caused by the changing market conditions, such as excessive supplies, changes in real price, sales tax, etc. But as time went by, the company was able to cope with it, as the most recent fiscal year closed with confidence and optimism towards its operations in the coming years. Its acquisition of subsidiaries in 2018 and 2019 might be of great help for ADM to keep jiving very well with the market. As projected, it would increase to $69.84 in 2019 and reach $71-72 billion for the next four to five years.

With this, 1Q 2019 confirmed the positive speculation on Archer’s sales, as it stayed at $15 billion. This could be a testament to the continuous growth in its sales. Now that the company keeps launching new product lines and acquiring entities of the same nature, added value would surely be realized anytime soon.

(Taken from MarketWatch)

The Linear Trend Analysis was utilized to estimate the values for the next five years.

(Taken from MarketWatch)

The Linear Trend Analysis was utilized to estimate the values for the next five years.

Meanwhile, operating costs did not go up. It was probably due to the fact that considering ADM’s competitors, there was an oversupply in the market. Luckily, the company was able to see it and make an action immediately amidst the changing production costs. For three to four years, ADM tried to maintain or slightly lessen production, while keeping costs at a manageable level. With this, the company was not deeply hurt, as gross profit and operating profit was maintained and was even increasing. From 2015 to 2017, gross profit remained at about $3 billion. As the company fully adjusted to the market change in 2018, it also moved in the same direction as its sales. It grew to $4.13 billion, which resulted in a 30% increment. This showed the company's clever strategy in operations.

(Taken from MarketWatch)

The Linear Trend Analysis was utilized to estimate the values for the next five years.

(Taken from MarketWatch)

The Linear Trend Analysis was utilized to estimate the values for the next five years.

Net Income

For the last 10 years, ADM was able to maintain its net income. Amidst the changes in the operations, its net income has been playing between $1.3 and $2.2 billion, which gave an average amount of $1.7 billion. As the operating costs and expenses were efficiently managed, the net value of non-operating items, such as interest income on investments, interest expenses, equity method investments gain/loss and others, remained almost constant. This also resulted in a well-managed amount of net income, which remained massive enough to solely cover the dividend payments and use the remaining hundred million to stimulate the operations. From $1.28 billion in 2016, it rose to $1.6 billion in 2017, before giving another $210 billion increment as it rose to $1.81 billion in 2018. The estimated values showed a positive change in its value, as it would result in $2 billion in 2024.

On the other hand, the company ended up with $230 million as its net income for 1Q 2019. This fell by 41% as compared to the same time series in 2018 at $390 million. Though it might appear as a plain decrease this year, one must understand that it was still huge enough to meet the dividends the company had to pay for the quarter and enhance 2Q operations. Moreover, one has to consider the acquisitions and product launching that ADM did during the first quarter of 2019. It completed the acquisition of Florida Chemical Company and Neovia and entered into agreements with other companies, which greatly affected its non-operating section income/expense, which also reduced net income. Nevertheless, one must consider that this could be an opportunity for further growth and not just an ordinary expense. With these actions, ADM would capture a larger portion of the market and have an added value in the future. Nasdaq agreed with this supposition, as it posted higher values of earnings for the succeeding time series.

(Taken from MarketWatch)

The Linear Trend Analysis was utilized to estimate the values for the next five years.

(Taken from MarketWatch)

The values for 2Q, 3Q and 4Q 2019 were taken from Nasdaq’s EPS multiplied by the current weighted average shares (WAV).

EPS

As expected, the EPS reflected the movement of net income, given that the weighted average shares have not been significantly changing. For the past 10 years, it has been playing between $2.00 and $3.00. Given the positive trend as well as the added value the company would surely have, the values for the next five years would go higher and reach $3.29 in 2019, and would even rise to $3.46 per share in 2023 and 2024. Nasdaq adhered to our optimistic outlook, as it posted EPS for 2019, 2020 and 2021 at $3.17, $3.66 and $3.73 respectively.

(Taken from MarketWatch)

The Linear Trend Analysis was utilized to estimate the values for the next five years.

(Taken from MarketWatch)

The values for 2Q, 3Q and 4Q 2019 were taken from Nasdaq

The Wall Street Journal estimated 2Q and 3Q 2019 EPS at $0.70 and $0.98 respectively.

Current Ratio

As the company continued to be profitable, more cash has been generated to stimulate its operations and leverage the acquisition of fixed assets. As time went by, the company’s operations remained growing, and so did the earnings it realized. But did the growth on its Income Statement prove its liquidity and sustainability?

The company’s current assets remained larger enough than the current liabilities. As ADM’s sales have been fluctuating, the operating costs have been managed properly, so the current assets have always been intact. For the past 10 years, it has been varying from $20 billion to $30 billion, with an average amount of $23.5 billion. On the other hand, the current liabilities remained lower than the current assets and have always been playing between $10 to $17 billion. With this, it could be seen that the current ratio has been ranging between 1.5 and 2.2. This showed that the company has been maintaining its liquid assets and could effortlessly cover all its current liabilities, should it wish to pay them all. For the next five years, it would decrease by about 8%, but what would matter here is the fact that even in the long run, ADM would have a current ratio of about 1.6 and would be able to meet its short-term obligations with a remaining value of $8.4 billion.

(Taken from MarketWatch)

The Linear Trend Analysis was utilized to estimate the values for the next five years.

Net Worth

Archer-Daniels-Midland has been solid for a long time given its strong fundamental health, and would continue to do so for the coming years. With increasing earnings, its capacity to purchase assets and leverage a larger operation rose throughout the years. Given this, it could be seen that the company’s long-term assets have been increasing as well, especially the intangible assets, while its PPE continued to play between $9.9 and $10.2 billion. This resulted in an upward trend of Total Assets, which increased from $30-32 billion to $40-43 billion. Meanwhile, Total Liabilities have not been changing significantly for the last 10 years and have been moving between $17-24 billion. With the amount of its assets and liabilities, the gap or Net Worth for the past 10 years has been $17.45 billion on average. It has always been large enough to meet all its obligations if ADM opts to make a single payment. Currently, the company’s Net Worth is $19.05 billion. The values for the next five years showed that the assets would still go up faster and larger than the liabilities, as the Net Worth would be between $20 billion and 23 billion.

ADM’s impressive Current Ratio and Net Worth proved the validity of the company’s formidable operations, from its sales down to its net earnings. It also showed that the company has been and would always be adequate to sustain its increasing activities and meet its financial obligations to all stakeholders. This is a testament to its long-lasting performance, which must assure all the investors that putting their money into ADM would be a wise decision, due to its solid and intact profitability, liquidity and sustainability.

(Taken from MarketWatch)

The Linear Trend Analysis was utilized to estimate the values for the next five years.

Technical Analysis

Stock Price

The price has been moving with moderate volatility. From $47-$48 in November, it became bearish and dropped to $39-$41 in late December to early January. Since then, the stock price has been varying without an absolute direction. It would rise by $2 to $3 on average for two weeks to a month before suddenly dropping by the same value. For instance, the stock price has been bullish from early January of this year to early February, as it has been rising from $41 to $44 in two to three weeks. On February 4, it was closed at $44.49, before suddenly dropping to $41.85 on the next day. This happened again in April. The stock price was almost constantly decreasing from about $43 on April 10-15, and it continued to go down to $42 to $41 on April 18-25. On April 26, the stock hit its lowest point at $40.91 as trading closed. On April 29, as the trading reopened on that day, it sharply rose to $43.27.

Currently, the stock price has been playing between $42 and $44. It has a P/E ratio of 14.63, which entails an investor to spend $14.63 for every earning. Given the actual price and the P/E ratio, purchasing a stock here is not bad at all - it is actually cheap. But is it really cheap, or does the intrinsic value suggest otherwise? The Dividend Growth Model was used to assess the real and intrinsic value of the stock.

  • Current Price (May 8, 2019 at 4:00 P.M.): $42.42
  • Cost of Capital Equity: 0.1339262694
  • Dividends per Share to be Paid for the Year: $1.40
  • Average Dividend Growth for the last 10 Years: 0.100922969
  • Cost of Capital Equity: 0.1337021776
  • Derived Value: $46.70115235, or $46.70

Given this, the current stock price is still cheap and undervalued by $4.3 per share. It will surely rise for the next few weeks or months until it reaches its real value. This may create a new and higher resistance and support level.

Growth Catalysts

Acquisitions

Archer-Daniels-Midland and Florida Chemical Company (ADM Completes FCC Acquisition)

Before the first quarter of 2019 ended, ADM fully acquired FCC. The company has long been revered for delivering high-quality, citrus-flavored enhancers and oils. This could open more doors for ADM. With this move, the company could use this to widen and further enhance its product lines by introducing new flavors of oils and flavor enhancers. If ADM could very well mix its products with FCC’s, a larger portion of the market demand could be captured. This, in turn, could further increase the company’s capability to meet the consumer preferences, which could be translated into higher sales. Higher earnings could be realized, which would be shared with all the company’s stakeholders.

Archer-Daniels-Midland and Neovia (ADM Completes Neovia Acquisition)

In February, ADM wholly acquired Neovia at €1.544 billion. With this move, ADM got value-added products and solutions for animal nutrition. The products and services that Neovia has been offering, particularly to the animals, could further strengthen the quality of ADM products of the same target market. This could develop and sustain animal husbandry and broaden ADM’s operations with its high-quality products and services. A higher amount of sales and earnings could be generated, which would continue sustaining its enlarging operations and an increasing amount of dividends.

Archer-Daniels-Midland and Gleadell Agriculture, Ltd. (ADM to Fully Acquire Gleadell Agriculture Ltd.)

Just three weeks after 2019 opened, Archer decided to acquire the remaining 50% stake of Gleadell, which includes its fully controlled subsidiary, Dunns, Ltd. Given this, ADM would merge it with ADM Arkady and ADM Direct UK. This would form ADM Agriculture, Ltd. This was a sagacious move on the company’s part, since Gleadell has been an established supplier of various agricultural products in Europe, particularly in the UK. With this, ADM would be able to penetrate the European market more and become more visible in the UK. This would be a successful expansion, since a large part of the continent is into agriculture. This would not only widen the company’s operations but also diversify its product lines, and could even create a fusion given the many acquisitions it did during the first quarter. A larger market demand must be anticipated. The sales would obviously increase as well as its bottom line earnings, which would also be shared with the company’s investors and employees. This could also create partnerships with some large European companies of similar nature, which would create more opportunities for ADM to showcase all the products and services it could offer.

Archer-Daniels-Midland and the Ziegler Group (ADM to Acquire the Ziegler Group)

Earlier this year, Archer decided to completely acquire Florida Chemical Company, which it did two months later. After its complete acquisition of FCC, the acquisition of the Ziegler Group became one of its goals this year. Natural citrus flavors seemed to capture the attention of ADM. Should the company settle its acquisition of Ziegler, it could use all the advantages it would get from acquiring FCC, like using its citrus flavor to produce other products or to enhance the products’ taste and scent. It would also help ADM to penetrate the European market more. With this, higher sales and earnings for the company and investors would be expected in the long run.

Partnerships

Archer-Daniels-Midland and Cargill (ADM and Cargill Joint Venture)

During 1Q 2019, ADM and Cargill formed their agreement to formally launch Grainbridge, LLC. This could help the farmers in North America gain access to information on agricultural production as well as the various marketing activities without costing them. It would also develop solutions, including the tools that would provide marketing, e-commerce and accounting support. This progressive trend would help the farmers get along with the innovative market. The success of this partnership could also create more partnerships with ADM, which would help it showcase more of its capabilities and resources. This could attract potential investors, which would further stimulate its operations and generate more earnings in the future.

Archer-Daniels-Midland and General Starch Limited (ADM and GSL Partnership)

Just as FY 2019 started, ADM made a huge leap by forming a partnership with General Starch Limited (GSL), one of the top producers of tapioca starch. In this agreement, ADM would have the sole right to distribute GSL tapioca starch in Europe. This would be an opportunity for ADM to gain a stronger presence in the European market given the more diversified products under its brand name. This could further expand its market and capture demand, which could result in higher sales, earnings and dividends for investors.

Conclusive Thoughts

Archer-Daniels-Midland has long been revered for its high-quality products and solid fundamentals amidst the unforeseeable changes in the market. The company continued to generate a substantial amount of revenue amidst the noticeable ups and downs for the past 10 years. It remained profitable and adequate to make dividend payments to investors. Meanwhile, the company's balance sheet ratios have always been impressive, as they adhered to the results on its Income Statement, which showed that ADM’s ability to generate earnings has been, and would be, sustainable. Along with the company’s formidable performance is the upward trend of its dividends and stock price. But are all these factors enough to invest here?

Long-term Investors: The dividends have been moving upward in substantial values. From $0.52 per share in 2008, it consistently went higher until it reached $1.34 per share in 2018. It’s really nice to know that despite the changes in the market, the company continued to realize net profit which has always been enough to meet its obligations to the investors. Furthermore, its Retained Earnings remained high enough that the company could effortlessly cover all its dividend payments and even all its obligations, should it wish to do so. It would still have billions to sustain its operations and finance its expansion. Given the continuous acquisitions by ADM as well as the successful partnerships and launching of new products, the company would realize an added value in the near future, which would translate into higher earnings. Investing here for a long period of time is both secured and profitable.

Short-term Investors: ADM is a bit exciting for the short-term investors given its moderate volatility. One must take note of the sharp changes in its price that have taken place several times. Despite this, the stock is still bullish, yet undervalued by more than $4. The price will most likely go up until it is set at its correct value, but investors must still watch out for the sudden increase or decrease of stocks to know when to buy or not. But given the fact that the price is still undervalued and relatively cheap with its P/E ratio at 14.63, short-term investors are highly encouraged to invest here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.