Valuation: Archer-Daniels-Midland Company (ADM)

Company Profile: Archer-Daniels-Midland Company (ADM) (obtained via Google Finance)

Archer-Daniels-Midland Company is engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities and products. The Company’s operations are classified into three business segments: Oilseeds Processing, Corn Processing, and Agricultural Services. The Company’s remaining operations are aggregated and classified as Other. In December 2006, The Hain Celestial Group, Inc. acquired the assets of Haldane Foods Limited and its meat-free and non-dairy beverage business based in Newport Pagnell, the United Kingdom, from the Company. In January 2007, CSM nv acquired the activities of the Company. As of the fiscal year ended June 30, 2007 (fiscal 2007), the Company operated 23 domestic wheat flour mills, a domestic bulgur plant, two domestic corn flour mills, two domestic milo mills, and 20 foreign flour mills with a total daily milling capacity of approximately 26,700 metric tons (1.0 million bushels). It also operates six bakery mix plants.

Business and Management Review

1) Is the business simple and understandable?

ADM is a processor of agricultural products including soy beans, corn, and wheat. In addition they are actively pursuing alternative energy solutions with agricultural byproducts such as ethanol. The business is fairly simple with the exception of the alternative energy research and manufacturing, but for the case of our analysis we will conclude that we understand this business and their operations.

2) Does the business have a consistent operating history?

On a pure financial viewpoint we can conclude that ADM has enjoyed a healthy year over year rise in both their top line and (more importantly) bottom line figures. Net income has risen from $494 million in 2004 to over $2.1 billion in 2006.

3) Does the business have favorable long term prospects?

We believe that their core business of agriculture processing will continue to grow at a healthy rate for the foreseeable future. Their energy solutions is where potentially they may see vast growth as industrialized nations begin to search for cleaner and cheaper energy solutions.

4) Is management rational?

The CEO and Chairman of the board are held by the same individual which sometimes raises a red flag, but overall we feel that management is acting in the best interest of the shareholders.

5) Is management candid with its shareholders?

Investor relations are fairly strong on their webpage, although we are somewhat disappointed when comparing the information presented when compared to other firms. However, a savvy investor can dig hard enough to find the information they are seeking.

6) Does management resist the institutional imperative?

As stated we are somewhat concerned with the CEO and Chairman titles being held by the same individual, but overall we are not concerned about management not resisting this imperative.

Financial and Value Review

Defensive:

1) Size of firm

With a market capitalization of roughly $22 billion, ADM passes the test of being over $2 billion.

2) Strong financial condition

With a weighted current ratio of about 1.8 the firm falls below the required 2. Fail.

3) Earnings stability

ADM has had positive net income for the past ten years, therefore they pass this test.

4) Dividend record

The firm has paid a dividend for the past ten years. Pass.

5) Earnings growth

Earnings have increased by 1/3 over the past ten years as well, therefore they pass this test.

6) Price to earnings analysis

Their P/E ratio (using our Methods) is roughly 18 and is below the required 20. Pass

7) Price to assets analysis

The P/B is below the required 2.5 (roughly 2.4), therefore this test is passed. As well the weighted P/B *P/E ratio meets our requirements and this test is passed as well.

Overall

Scoring 7/8 ADM clearly passes the test for the Defensive investor and this security should be considered for their portfolio.

Enterprising:

1) Strong financial condition

Current ratio is above 1.5. Pass.

2) Earnings stability

The debt to net current assets is below the required 1.1 (it is about .70). Pass.

3) Dividend record

The firm currently pays a dividend therefore they pass this test.

4) Earnings growth

Earnings are greater than what they were five years ago. Pass.

5) Price

Currently ADM is trading at a price which is above the required 150% of net tangible assets, therefore they fail this test.

Overall:

Scoring 5/6 ADM passes the test for the enterprising investor and this stock should be considered for their portfolio.

Valuation:

We find a fair market value for ADM to be around $50 per share.

Opinion:

Seeing that this security passed both the defensive and enterprising investor requirements along with current market price we recommend this stock for both investors. Currently the stock is trading around $35 per share which is clearly below our internal valuation. We feel that the earnings and dividend history is strong along with our confidence that these figures will continue in the future.

None of the staff of ModernGraham.com held a position in Archer-Daniels-Midland at the time of publication. Also, please read our disclaimer and Our Methods.


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