I’ve written quite a bit in this space about my opinion that the Consumer Staples sector – and more specifically, stocks in the Food Products and Food and Staples Retail industries – are smart places to find good values in today’s market. That’s because most of the stocks in these industries are benefitting from the extended, eat-at-home trends that are a product of COVID-19 – but they 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 demand means that while these industries have collectively performed pretty well throughout the past year, there are still a lot of stocks to work with at very nice 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 not too surprisingly has led the market’s rally from March 2020 bear market lows. Many of the biggest names in the sector have led the way, and in particular companies that were positioned on the right side of remote workforce, collaboration, and cloud-based services at the onset of the pandemic have clearly been at the front of the pack. That might make a pure contrarian shy away from buying stocks in the industry – but the truth is that there are still some big, established names in that sector that offer very interesting value propositions.
The same principle holds true, but in reverse fashion for the Food Products industry. While there are a lot of good companies trading at nice enough prices to fit my criteria for a good, long-term, value-based investment, there are others that investors have pushed to aggressive new highs that aren’t supported by their underlying fundamentals. One of those names is Archer-Daniels-Midland Co. (ADM) – one of the biggest U.S. processor of agricultural goods. The company has benefitted throughout the past year by the U.S. consumer push to stock up pantries, including trends towards plant-based proteins. Those are more than a few good reasons that the stock has increased from a March 2020 low at around $29 to a fresh 52-week high this week at around $67; but the truth is that even with those positive elements in place, ADM is a company with some red flags in its fundamental profile – particularly negative Free Cash Flow and a narrow operating profile that allows little room for error. ADM is an interesting company to keep on a watchlist – but it’s hard to make a value-based argument for this stock.
Fundamental and Value Profile
Archer-Daniels-Midland Company is a processor of oilseeds, corn, wheat, cocoa and other agricultural commodities. The Company manufactures protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol, and other food and feed ingredients. Its segments include Agricultural Services, which utilizes its United States grain elevator, global transportation network and port operations to buy, store, clean and transport agricultural commodities, such as oilseeds, wheat, milo, oats, rice and barley, and resells these commodities primarily as food and feed ingredients and as raw materials for the agricultural processing industry; Corn Processing, which is engaged in corn wet milling and dry milling activities; Oilseeds Processing, which includes global activities related to the origination, merchandising, crushing and further processing of oilseeds; Wild Flavors and Specialty Ingredients products, which include flavors, sweeteners and health ingredients; Other, and Corporate. ADM’s current market cap is about $37.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased more than 117%, while sales grew by a little over 26%. In the last quarter, earnings improved nearly 15% while sales increased just over 5%. The company operates with a very narrow margin profile, which isn’t that uncommon in its industry. Net Income versus Revenues over the past year is 3.03%, but improved somewhat in the last quarter to 3.65%.
Free Cash Flow: ADM’s free cash flow is negative, by about -$2.2 billion, and that is a big red flag; it is an indication that the company’s financial flexibility is becoming more restrictive. This is a number that, like Net Income, has been negative since the beginning of 2017, only briefly touching positive territory in the first quarter of 2018. It is, however worth noting that this number has improved throughout the past year from around -$3.9 billion a year ago.
Debt to Equity: ADM has a debt/equity ratio of .40. This is a conservative number. The company’s balance sheet indicates that while margins are tight, operating profits are adequate to service their debt, with almost $7.1 billion in cash and liquid assets versus more than $8.4 billion in long-term debt; however ADM’s negative Free Cash Flow suggests that the company relies largely on cash to service its debt. The longer that condition persists, the more likely liquidity is to become a question mark.
Dividend: ADM pays an annual dividend of $1.48 per share, which translates to an attractive yield of 2.22%. ADM is a company that has raised its dividend every year for the last 45 years, including a $.01 per quarter increase at the beginning of this year. That strongly indicates that the risk the dividend will be cut or eliminated is low.
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 around $33 per share. That means that ADM is very overvalued, with about -50% downside from its current price. That also puts ADM’s bargain price at around $26.50.
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 upward trend from a low in May of last year at around $33 to its peak at the end of this week at around $67. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock had been consolidated at around $59 until late April, when a new surge of buying activity accelerated the stock’s push to this week’s high point at around $67 per share. That makes it difficult to identify immediate resistance, with current support all the way back at previous resistance around $59 per share.
Near-term Keys: There is really no way to describe ADM a good value right now. The stock’s current push to accelerated highs also means that a bullish short-term trade, by buying the stock or using call options would be highly speculative right now. A pivot, however off of current resistance anywhere around the stock’s current price could offer an interesting opportunity to short the stock or buy put options, using $59 as a useful profit target on a bearish trade.