Over the last few years, I’ve used stocks in the Food Products industry to find useful value under often uncertain market conditions.
Food Products companies, and others in the Consumer Staples sectors don’t generally get a lot of investor attention because they just aren’t very “sexy.” The dichotomy between fundamental strength and lack of investor interest often means that these industries generally tend to be resilient when economic conditions turn difficult – but you won’t hear talking heads or other market media types talking about them. That’s a counter-market trend that I’ve also found useful, since it helps me discover and work with stocks that the rest of the market simply dismisses at much better prices.
As is always the case, you have to be careful about casting your net too wide when it comes to industry or sector-based generalizations. A good example is the Technology sector, which has led the market for most of the past several years, both to the upside during the early stages of the pandemic as the corporate world relied on technology to maintain operations, and to the downside in 2022 as concerns about inflation, supply chain issues, and so on increased. The interesting part of both bullish and bearish conditions is that in either case, for a bargain hunter there are always useful opportunities to be found, if you’re disciplined and diligent.
The same principle holds true for the Food Products industry. While there are a lot of good companies in the industry, the market has finally begun recognizing the value in these stocks over the last year or so, even as inflationary pressures in have increase input costs and rippled out to the consumer level. That means that in some cases, the stock’s current price has exceeded the company’s underlying fundamental strength. One of those names is Archer-Daniels-Midland Co. (ADM) – one of the biggest U.S. processors of agricultural goods. Concerns about inflation pushed this stock off of a high in November of last year at around $98 to a low in June at around $70 per share. Over the last month and a half, the stock has rallied again, pushing above $80 this week. What is the value price that the company’s fundamentals suggest? Let’s find out.
Fundamental and Value Profile
Archer-Daniels-Midland Company is a human and animal nutrition company. The Company is an agricultural supply chain manager and processor. It operates through three business segments: Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition. The Ag Services and Oilseeds segment includes global activities related to the origination, merchandising, transportation, and storage of agricultural raw materials, and the crushing and further processing of oilseeds such as soybeans and soft seeds into vegetable oils and protein meals. The Carbohydrate Solutions segment is engaged in corn and wheat wet and dry milling and other activities. The Nutrition segment is engaged in the manufacturing, sale, and distribution of a range of ingredients and solutions, including plant-based proteins, natural flavors, flavor systems, natural colors, emulsifiers, soluble fiber, polyols, hydrocolloids, probiotics, prebiotics, enzymes, botanical extracts, and other specialty food and feed ingredients. ADM’s current market cap is about $44.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 10%, while sales grew by 1.78%. In the last quarter, earnings increased by 8.3% while sales declined by -8.23%. The company operates with a historically narrow, but stable margin profile. Net Income versus Revenues over the past year is 4.37%, and 4.86% in the last quarter.
Free Cash Flow: ADM’s free cash flow over the last twelve months is $1.65 billion. That is roughly the same as a year ago, but does mark a decline from $2.7 billion three quarters ago and $2.15 billion in the quarter prior. The current number translates to a modest Free Cash Flow Yield of 3.76%.
Debt to Equity: ADM has a debt/equity ratio of .31. This is a conservative number. The company’s balance sheet indicates that operating profits are adequate to service their debt, with almost $9.6 billion in cash and liquid assets versus $7.7 billion in long-term debt. The company’s operating profile, free cash flow, and liquidity all indicate servicing their debt is not a problem.
Dividend: ADM pays an annual dividend of $1.80 per share, which translates to an annualized yield of 2.22% at the stock’s current price. ADM is a company that has raised its dividend every year for the last 46 years, including a $.20 per share increase at the beginning of 2022, and a $.05 per share increase at the start of 2023. That strongly indicates that the risk the dividend will be cut or eliminated is low and puts the company in the Dividend Aristocrat category.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at around $52.50 per share. That means the stock is significantly overvalued at its current price, with -36% downside from its current price, and a practical discount price at around $42.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the stock’s price activity for the past year. The diagonal red line traces the stock’s downward trend from its peak in October of last year at around $98 to its June low at around $70. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has rallied from that low, pushing above the 38.2% retracement line this week to mark current support at around $81 per share. Immediate resistance is at $83, based on pivot high activity seen in April and February of this year. A push above $83 should have near-term upside to about $85, while a drop below $81 should find next support at around $78.50.
Near-term Keys: Even as ADM’s fundamentals demonstrate solid strength, the fact is that there is really no way to describe the stock a good value right now. That means that any kind of long-term decision to buy the stock would have to be based strictly on growth rather than value, with an eye on continued inflationary pressures that are affecting the entire industry right now. I think that means that for ADM, the best probabilities lie in short-term trading strategies. Use a drop below $81 as a signal to consider shorting the stock or buying put options, with $78.50 acting as a good initial profit target level. A push above $83 could offer a signal to either buy the stock or start working with call options and looking at $85 as a practical, short-term profit target for a bullish trade.