The stock of Archer-Daniels Midland Co (NYSE:ADM, 30-year Financials) shows every sign of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $57.91 per share and the market cap of $32.3 billion, Archer-Daniels Midland Co stock is believed to be modestly overvalued. GF Value for Archer-Daniels Midland Co is shown in the chart below.
Because Archer-Daniels Midland Co is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 2.4% over the past three years and is estimated to grow 1.50% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Archer-Daniels Midland Co has a cash-to-debt ratio of 0.06, which ranks worse than 86% of the companies in the industry of Consumer Packaged Goods. Based on this, GuruFocus ranks Archer-Daniels Midland Co's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Archer-Daniels Midland Co over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Archer-Daniels Midland Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $64.4 billion and earnings of $3.15 a share. Its operating margin is 2.74%, which ranks in the middle range of the companies in the industry of Consumer Packaged Goods. Overall, the profitability of Archer-Daniels Midland Co is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Archer-Daniels Midland Co over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Archer-Daniels Midland Co is 2.4%, which ranks in the middle range of the companies in the industry of Consumer Packaged Goods. The 3-year average EBITDA growth is 4.3%, which ranks in the middle range of the companies in the industry of Consumer Packaged Goods.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Archer-Daniels Midland Co's return on invested capital is 4.98, and its cost of capital is 6.06. The historical ROIC vs WACC comparison of Archer-Daniels Midland Co is shown below:
In closing, The stock of Archer-Daniels Midland Co (NYSE:ADM, 30-year Financials) appears to be modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Consumer Packaged Goods. To learn more about Archer-Daniels Midland Co stock, you can check out its 30-year Financials here.
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