Rising global demand for agricultural products is a sweet deal for Archer Daniels Midland Co., but the rising cost of inputs such as corn? Not so much.
ADM’s stock has tumbled 19 percent just since the beginning of May, from $37 a share to $30.04 during midday trading Thursday.
The agricultural giant, which takes commodities like corn and cocoa and turns them into products like ethanol and cocoa powder, has the opportunity to capture market share amid record high demand for U.S. farm exports. Some analysts think profits, and ADM’s shares, will rebound in the next two quarters.
Morningstar Inc. upgraded its outlook on ADM, raising its fair-estimate value to $34 per share from $32 on May 9th.
“Most of the upgrade came from the 2011 revenue projection. On one hand we are concerned about their corn business, but we expect the soybean business will remain strong,” said Min Tang-Varner, analyst for Morningstar Inc.
Ethanol producers, including ADM, are being squeezed by record-high corn prices, as commodity inflation outpaces the ability to pass price increases along to end-users.
JP Morgan Corp. expects other parts of ADM’s corn business to deliver, driven mainly by its “continued strength in the bio-products unit and improving trends in the sweeteners and starches unit,” analysts wrote in a note published May 3rd.
According to the U.S. Department of Agriculture, farm exports are estimated to jump 26 percent to a record $137 billion this year, driven largely by a weak dollar and lower agricultural production abroad. This is a prime opportunity for ADM, the world’s largest grain processor, to expand its reach globally with its expansive network of more than 240 processing plants.
So far this year, the company has set record volumes in its agricultural-service segment since global production for grain has stalled. ADM’s sales received a boost in its third quarter ended March 31, rising 32.6 percent to $20.08 billion from $14.15 billion a year ago. The company’s oilseeds processing unit delivered the strongest results with a 26 percent profit jump.
ADM’s price-to- book ratio of 1.22 is much lower than the food products industry average of 2.67, suggesting investors may currently be undervaluing the company. Its price-to-sales ratio is equally attractive for investors with just a 0.28 ratio compared with 0.91 for the industry.
While ADM’s price-to-earnings ratio of 9.16 is higher than the sector’s average of 8.70, it’s cheaper than for the broad stock market’s 16.19 ratio.
The most promising segment of its business is in the oilseed segment. ADM should receive a boost in 2011 from what the USDA estimates will be a record-setting $30.2 billion in global demand for oilseeds and products.
But debt woes on its balance sheet are hindering ADM’s performance. Debt is at 43 percent of the company’s equity, largely because of inventory buildup from the tsunami in Japan. Higher commodity prices have also contributed to its debt since the company needs to pass off its rising costs to its customers, something ADM failed to do last quarter.
But analysts expect ADM will renegotiate higher prices in its customer contracts moving forward, which will be reflected on its balance sheet.
“We expect the debt level to gradually come down through the year as the company works down the high inventory level,” wrote Min Tang-Varner.
Overall, ADM is in a position to gain market share with the rising demand for U.S. agricultural products, and has been acting aggressively to do so. The company continues to invest in shipping facilities and grain elevators around the world.
In the meantime, its stock might have to endure a bumpy ride as price increases take effect and its debt is paid down.