So far, it’s been a tumultuous year for food processor Archer-Daniels Midland (NYSE:ADM). The company has had to deal with volatile commodities prices as well as major geopolitical events, such as in the Middle East and North Africa.
Of course, the stock price has been volatile. Yet ADM continues to invest aggressively in its business.
So, with a stock that is 14% from its 52-week high, is this a good time for investors to pick-up some shares? Here’s a look at the pros and cons:
Pros
Global platform. ADM is one of the world’s largest agriculture commodity companies. It has infrastructure that spans origination, processing and distribution for a wide variety of commodities, like corn, soybeans, cocoa and wheat.
With this system, ADM also has an information advantage. This has been a big help for its trading business.
Innovation. ADM continues to spend large amounts on research & development. And it has been getting results. For example, the company has developed products like Vegefull, which has dried edible bean products. It provides a strong source of protein and fiber.
ADM also has engaged in various partnerships to create new products. One is with ConocoPhillips (NYSE:COP) to develop renewable transportation biofuels and biomass.
Solid financials. In the latest quarter, ADM generated net income of $578 million. There is also nearly $4 billion in the bank. And as for the debt load, it is a reasonable $6.8 billion.
Cons
Capital investments. ADM’s integrated model requires long-term commitments. For example, the company builds barge-loading terminals, elevators, shuttle loaders, plant facilities and so on.
Costs. ADM is vulnerable to volatile commodities prices. While the firm is adept at hedging, this is far from foolproof. In some cases, the main problem is actually getting supply of a key commodity. This may be the result of adverse weather or even political instability.
Of course, another major cost is energy. Operating processing plants requires huge amounts of electricity, natural gas and coal. There are also large costs for transportation.
Regulations. ADM must deal with mind-numbing compliance requirements across the globe. Examples include tariffs, duties, taxes and import-export restrictions. Perhaps the most important involve the incentives for ethanol production. In light of the budget problems on Capitol Hill, there is uncertainty about these programs.
Verdict
The agriculture business is full of wide swings in prices. But ADM has a strong management team that knows how to manage things. They understand how to make prudent investment decisions and allocate capital efficiently – while focusing on growing the company.
Keep in mind that ADM has posted an average annual return on its earnings per share of about 20.9% over the past 10 years. And this consistency is likely to continue.
So, with an attractive valuation — coming at about 11 times earnings — the pros outweigh the cons on the company’s shares.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
