KO - Archer-Daniels-Midland: Bigger Value Than You May Traditionally Think

Summary

• Archer-Daniels-Midland Company is a well-diversified company with robust financial performance.
• ADM has good practices and innovative solutions to ensure sustainability.
• Improvement in commodity price will help ADM’s revenue and growth significantly.
• At the current price of $85, I would recommend continually monitoring the company initiatives and strategy plan, and to enter at a favorable price.

Thesis

Archer-Daniels-Midland Company ( ADM ) is a well-diversified company with a good track record of revenue and earnings growth. It operates in the global food and agriculture industry, which is generally a stable and essential sector. It brings long-term value with its size, scale, synergy effect from its multiple, and vertical business chain.

With the increase in demand for commodities and the company's effort to create long-term value, I expect Archer-Daniels-Midland Company's financial performance will sequentially get better over the next 2-3 years. At the current price of $85, I would recommend continuing monitoring Archer-Daniels-Midland Company initiatives and strategy plan, and to enter at a favorable price.

Company Overview

Archer - Daniels-Midland Company is an American global food processing and commodities trading corporation operating in more than 160 countries. It is one of the largest processors of soybeans, corn, wheat, and cocoa in the world. ADM has three primary segments: Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition. ADM also generates revenue through its other business activities such as transportation, and trading of agricultural commodities, and risk management services.

Known as the ABCD group in the food and agriculture industry, ADM competes with Bunge Limited ( BG ), Cargill Inc., and Louis Dreyfus Company. Other competitors include Nestle ( NSRGY ), Coca-Cola ( KO ), and General Mills ( GIS ).

The company is inherently exposed to risks associated with their industry, such as commodity price, geopolitical situation, and economic disruption. ADM is a well-managed company that continues to bring long-term value with its size, scale, synergy effect from its multiple, and vertical business chain.

These are some of the factors we need to keep in mind to understand ADM's prospects.

1. ADM has r obust financial performance and strong liquidity

ADM has continued to show resilience in its financial performance. In FY2022 Q4 , ADM reported $1.93 earnings per share ((EPS)) for the quarter, exceeding analysts' consensus estimates of $1.65 by $0.28. It has $26.23 billion revenue during the quarter, compared to $23.09 billion last year.

According to the FY2022 Q4 earnings call , ADM's cash flow from operations before working capital is $5.3 billion, while the Capex is $1.3 billion, and the cash returned to shareholder is at $2.3 billion. ADM's annualized dividend is at $1.80 per share, with a yield of 2.1%.

ADM is a top player in their industry, and improvement in the commodity price and the increased demand will help to drive the company's top line. In addition, as the demand for the low-emission goods and renewable products increase, the company has the potential to capitalize on that through its new R&D development and production.

2. ADM has good practices and innovative solutions to ensure long-term sustainability

In today's world, rapid climate change, changing demands and policies has prompted companies to be innovative and to seek for sustainable solutions to ensure environmental protection and product sustainability in the long run. ADM management team understands their business environment well and is continuously improving and innovating to ensure long-term growth for the company.

One of the examples is ADM is focused on the regenerative agricultural efforts through its strategic partnership with PepsiCo to enroll up to 2 million regenerative agricultural acres over the next 7.5 years. The benefits are having a sustainable food produce, improving the fertility of the land, making it more resilient to climate change and other disturbance. According to the United Nations, the world population will continue to grow and is projected to reach almost 10 billion by 2050. Together with increasing incomes and urbanization, there will be increased demand for food and essentials. Having a long-term sustainability plan is vital for a company's continuous growth.

With the assumption of global warming, increasing population, inequal or volatile production of the commodities around the world, ADM may hold an even bigger value than we would traditionally think. Hence, I have strong positive stance on the company's long-term value, on top of the dividend yield that you can achieve.

3. Improvement in commodity price should help ADM's revenue and growth significantly

As a global company with different major streams of revenue, ADM is exposed to a variety of factors that can cause fluctuations in revenue. If we look at the company's 10-year revenue growth trend, it ranges from -16.6% to 32.5% annual growth. Commodity prices are cyclical and vary greatly over due to the supply and demand, weather conditions, geopolitical events, and global economic conditions. Commodities that are considered necessities, such as food and energy, tend to have more stable prices over time, while prices for other commodities, such as metals, can be more volatile.

Commodity prices have been pressured in recent years due to a combination of factors such as oversupply from the increased production in major producing countries, weak consumption demand, and a strong U.S. dollar. As the global economy is recovering from the COVID-19 pandemic, coupled with an increase in the demand for commodities, it should translate to growth for ADM.

We can label the period during the COVID-19 as supply chain shock for every production and logistics. As the pandemic situation ease, we may see the supply chain improve over time. ADM management team has done a good job by understanding the market challenges, and to be ready to gain the operation efficiency. For example, in the FY2021 Q4 earnings call , ADM was looking to develop the crops in South America to mitigate the impact from the unfavorable weather conditions.

Even with cyclical nature of the company's business, it supports the long-term value with its size, scale, synergy effect from its multiple, and vertical business chain. With the increase in demand for commodities and the company having a good management team, I expect the company's financial performance will sequentially get better over the next 2-3 years.

Valuation and Opinion

My valuation for ADM is based on ADM's financial statement and earning forecast, and the analysis is driven by Seeking Alpha data .

ADM is a market leader in the industry and has a good management team and investment strategy for the long term. With its financials standing, growth prospect, and long-term business sustainability, the company is going in the right direction.

Looking at the cash flow, earnings, and strong financial results, I would say with PER 11, ADM's stock price is neither cheap nor expensive. However, based on the overall positiveness in ADM and if held for 2-3 years, I expect the company's better financial performance will provide some gains on top of the potential dividend increase or stock repurchases.

I would recommend continuing to monitor Archer-Daniels-Midland Company's initiatives and strategic plans, and to enter at a favorable price.

For further details see: