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Archer-Daniels-Midland: Value In This Stodgy Old Company (NYSE:ADM)

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Via SeekingAlpha.com

I’ve been thinking a lot about finding companies to invest in that will prove to do well in what I believe to be an upcoming inflationary period, as soon as 1-2 years out. I’m also concerned about the long-term value of the US dollar. Thus, I’m looking for companies that can also act as a hedge against both inflation and a decline in the value of the dollar. Lastly, of course, I want to only purchase securities that are selling at a price well below their present worth.

Image Source: Company website

Archer-Daniels-Midland (ADM) is a food procurement and processing company with a global footprint. The business is multifaceted within the food processing industry. It is engaged in oil seed processing, corn processing and other agricultural services as the bulk of its operations.

The global footprint helps to diversity the currencies which they receive from operations. In the event that the US dollar declines in value relative to foreign currencies, the more dollars would be received when those funds get converted back to dollars as the currency hedge. Total Revenue for ADM in 2019 was $64.656 billion, of which $37.147 were foreign sales, or about 58% of total sales.

Archer-Daniels-Midland reminds me of what I read years ago in Jeremy Siegel’s book The Future For Investors.

His first chapter is called “The Growth Trap.” He makes the point by posing a question that in 1950, if you were given the opportunity to invest in IBM or Standard Oil Company, knowing that over the following 53 years, IBM would grow revenues at an average annual rate of 12.19% per year versus Standard Oil’s 8.04%, which would you rather invest in? IBM would also have higher growth rates of earnings and dividends too. It would have a clear advantage in growth on all accounts.

After the 53 years, $1,000 invested in IBM, with dividends reinvested, would return 13.83% per year and be worth $961,000. An investment of $1,000 in Standard Oil would return 14.42% per year and be worth $1,260,000 after 53 years when dividends were reinvested.

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AMD is like Standard Oil, where it’s not going to grow fast but it’ll always sell at price that is somewhat reasonable, so that as the company pays dividends, those dividends get reinvested at fair prices.

Investors will tend to always put a premium on faster-growing companies, and they should be aware of that “growth trap” when deploying their capital for new purchases.

ADM has been around for a long time. It was founded in 1902 and became incorporated in 1923. The company’s headquarters are in Illinois.

Here is a stock chart that goes back to 1985:

Certainly, there are periods of time when it gets overvalued and when it gets undervalued. The long-term success of ADM is right here in this chart.

The company has paid a dividend for 353 quarters straight. That’s 88.25 years!

Value

As a value investor, I want to know the book value per share. Any company can borrow against its assets and buy back shares and simply leverage the company out to where the debt holders wind up owning most of the enterprise. This, of course, makes the company more risky for equity holders or owners of common shares.

For example, back in January, I wrote about Michaels Companies (MIK) as such a name with so much debt that the equity holders now have tremendous risk. The shares are now down 70% since that article was published.

ADM has what I would consider a conservative balance sheet. It has total assets of $43.997 billion and total liabilities of $24.714 billion. This leaves the shareholders’ equity at $19.283 billion.

The current market cap is $19.31 billion as of the close on Friday, April 3.

The shares are trading right around book value.

Here is a long-term chart of the price-to-book value of ADM:

ChartData by YCharts

From time to time, ADM will trade around 1x book value. The range of price-to-book value is usually around 1.3x-1.6x, per the chart above.

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Another factor worth giving thought to is the consistency of earnings. Given that ADM is a processor of food products, in the sense that it will purchase grains and other farm products at market price, process them and then sell them to its customers at market prices, the prices of the commodities themselves will not play as big a role.

What I’m finding does play a big role in the success of the business is simply the overall demand for grains and farm products to simply be processed.

So, here is a chart of the gross profit margins:

ChartData by YCharts

Margins declined over the last 20 years, but have been very, very consistent otherwise.

Net income has never been negative in the past nearly 30+ years that this chart goes back.

ChartData by YCharts

An important metric is the earnings on assets. This ensures that there are enough profits to use to deploy back into the business’s capital needs.

Here is a chart showing earnings on assets as well as return on equity:

ChartData by YCharts

ADM is capital-intensive, needing a lot of equipment for processing and for the transportation of the products.

There is good consistency for ADM having a profitable enterprise with reasonable margins ensuring that the company will continue to have a long life.

Competition

It’s worth comparing ADM to its competition. One company that comes to mind is Bunge (BG). The other is Cargill, which is privately held.

Bunge has a market cap of $5.27 billion, roughly 1/4th the size of ADM.

I can compare returns on assets and equity as a good metric to determine which operation is more efficient:

ChartData by YCharts

What stands out is the consistency of Bunge’s earnings. Recently, the earnings were hit with a one-time charge that contributed to loses. The one-time charge was $1.7 billion related to a joint venture in Brazil.

What stands out is the consistent lower level of earnings on assets relative to ADM. (Green line being under the orange line.)

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ADM has pretty much consistently sold at a price that has a higher dividend yield versus Bunge.

ChartData by YCharts

The two companies’ price-to-book values have been pretty similar.

ChartData by YCharts

So, ADM has had higher earnings on assets, has been able to pay higher dividend rates, and when I compare the two stocks’ performance over the past 10 years, ADM has well outperformed Bunge.

Conclusion

ADM can be considered old and stodgy, which I think is a good word to describe the company, as it has two meanings: 1. dull and uninspired, and 2. (of food) heavy, filling and high in carbohydrates. By the way, I say that as both a pun and a compliment. There is much to be admired about longevity!

I bought some ADM stock today and plan to dollar cost-average more shares in the near future. I’ve been reluctant to use cash yet with all the uncertainty about how the global economy responds when it opens back up. The response to flatten the curve may prove to be that we’ve bitten off more than we can chew, leading to unintended dire economic consequences. So, I think it remains prudent to keep some powder dry.

However, cash does not pay anything now with rates at 0%, and if inflation moves up, there will be more reason to own stocks that will hedge the negative real returns from holding cash.

What I’ve seen so far has given me reason to want to start to build a position in ADM. I plan to continue to do research on this company to see if I can find a good reason not to buy shares, and until I do, I hope I can continue to build a long-term position in this strong company.

Disclosure: I am/we are long ADM. 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.




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