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Archer Daniels Midland (ADM) – The Ag Company Buffett Should Buy

November 21, 2011 | About:
Federico Flom

Federico Flom

6 followers
Archer Daniels Midland (ADM) is a large agricultural commodity company comprising agricultural origination, processing and distribution activities. The company generates corn, soybeans, wheat, and cocoa through farmers. Refineries are then in charge of processing them, thus creating value along the chain. Furthermore, the company has in-depth knowledge about changes in the global market prices. It is a stock that has all of the things Warren Buffett would want as an investment for Berkshire Hathaway (BRK.A)(BRK.B).

Apart from what it already does, ADM is making investments and efforts to expand its applications and incorporate new commodities such as palm, sugar and other biomass. Soybean is the most commonly known source, but ADM has started to diversify through cotton seeds, sunflower seeds, canola, peanuts, and flaxseed.

This makes it strongly competitive vis-à-vis its rivals in the region. Although the company is subject to price fluctuations in both feedstock and commodity end products, it makes a difference because it owns the network for collection and distribution. Owning the network provides ADM a bargaining power, especially regarding suppliers. Not only does ADM harvest crops, but it also provides end products such as salad oils, margarines, sweeteners and biodiesel, among others.

Its goal: to increase global demand. And it has been successful. The effort in expanding its products and marketing them well will continue to add value and let ADM take advantage of new opportunities in the food chain.

Lately, it has been developing low-trans fat oil feeds and soy-based protein products to spread the market and meat consumers' demands in terms of healthy food.

ADM has the capacity to secure a stable crop input supply and meet demand and supply across the continents.

For decades it has been consolidating its leading position within the agricultural industry across North America, Brazil and Europe. Now, it is conquering the Chinese market due to soybean demand.

ADM's earnings are largely represented by fructose, corn syrup, lysine, citric-acid and corn-based ethanol; products with which the company has set a footprint.

How has ADM been able to grow so strongly? The answer is management. After a scandal that has even made the FBI participate, Allen Andreas first and then Patricia Woertz encouraged improved corporate governance. This strategy helped ADM to expand but it also helped it to institute independent directors and issue restricted-stock awards.

Woertz continued with her predecessors' initiatives and focused on the reporting structure, selling non-core business lines and strengthening the company's global operations.

I think ADM is doing very well. Management is helping and encouraging production. But as every investor, I am also interested in quarterly results.

EPS dropped by 13% from the prior-year quarter, thus reflecting market conditions. ROE has also been volatile following the EPS trend. Corn costs have been increasing reducing profits from $341 million to $179 million and oilseed margins have been weak lately.

The economic situation has made it difficult for ADM to offset costs in prior quarters. Nevertheless, the company has not given up. It is permanently looking for pricing gains and has firmly decided to improve margins next year. And I bet it will.

Indeed margins are above average levels and the company has been able to offset weak results in oilseeds and corn, improving agricultural services operating profit, which reached $244 million from $132 million.

The recovery in exports has been very powerful. That is not all. Fiscal year 2011 saw a 31% jump in revenue backed by strong commodity prices. Although EBITDA margin shrunk due to the lack of pricing powers, forecasts are slightly clearer. Actually, EBITDA is expected to recover.

Revenue is expected to grow around 3%-5% as well as the operating profit. Apparently the oilseed processing segment will be a strong contributor.

Last but not least, dividends have greatly increased in 2011. And nobody dare tell me that is not important. The board of directors approved a 6.70% increase, pushing dividends to 16 cents per share.

Actually this stable dividend growth has resulted in an 8.80% total return to shareholders.

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ADM is a great chance to invest. Although there may be fluctuations, management's strategy is to have a forward-looking approach rather than stand on past events. Indeed, it has been able to expand processing capacities and is spending large amounts of money in acquisitions and plant expansion and construction.

Moreover, management is committed to shareholders. Distribution increases translate into double dividend payment.

Rating: 2.6/5 (17 votes)

Comments

Adib Motiwala
Adib Motiwala - 3 years ago
Thanks for the post. a comment on valuation and competition would be highly appreciated.
chu082011
Chu082011 - 2 years ago
Thank very much for sharing. I like this thread very much. I want share some my ideals.

Apart from that, you also can ref more resources at: Archer Daniels Midland interview questions

Tks again and pls keep posting.

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