This Company Could Become One of Buffett's Favorites (Part 2)
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Thompson Reuters analyst John Kozey recently released 28 stocks that shared the same characteristics as those Warren Buffett has purchased in the past. In the previous article, I talked about Mosaic, one of the leading phosphate and potash producers in the world. This time, I will cover Archer Daniels Midland (NYSE: ADM), and Warren Buffett has already shown interest in the company by buying nearly 6 million shares in the company in the fourth quarter of 2012.
Let’s have a closer look into Archer Daniels Midland to see whether or not investors should follow Warren Buffett into this company.
Archer Daniels Midland, founded in 1902, is considered the largest global processor of oilseeds, wheat, cocoa, corn, and also the leading manufacturer of vegetable oil and protein meal, operating in three main segments: Oilseeds Processing, Corn Processing and Agricultural Services. The Oilseeds Processing segment is to process soybeans and soft seeds into protein meals and vegetable oils. The Corn Processing segment is to convert corn into sweeteners and starches while the Agricultural Services is to buy, store, and transport agricultural commodities.
$42 billion, or 47% of total revenue, was generated from the Agricultural Services segment, while Oilseeds Processing ranked second, with $34.7 billion in 2012 revenue. Among the three segments, Oilseeds Processing brought the most operating profit, $1.3 billion, to the company, with an operating margin of 3.75%. The operating margins of the Agricultural Services and the Corn Processing were lower, at 2.25% and 2.15%, respectively.
Growing company with an increasing dividend history
In the past 10 years, Archer Daniels Midland has managed to consistently increase its revenue, from $30.7 billion in 2003 to $89 billion in 2012, while its EPS has followed the same trend, growing from $0.7 in 2003 to $3.13 in 2011. However, EPS declined to $1.84 in 2012. The decrease in EPS was caused by the increase in agricultural commodity costs as well as asset impairment, exit and restructuring costs.
Shareholders of the company should feel comfortable, as the company employs a quite reasonable amount of debt. As of December 2012, it had $18.92 billion in total stockholders’ equity, $5.93 billion in cash and short-term investments, and only $10.5 billion in debt.
In the calendar year 2012, the company reported that it had returned more than half of its free cash flow to shareholders in the form of both share repurchases and dividends, while the remainder of free cash flow has been used to reduce debt. Going forward, Archer Daniels Midland indicated that the company would restart its share buyback program on a modest basis. In the calendar year 2013, the company expects to spend around $1 billion in capital expenditures, excluding acquisitions. Interestingly, the company has increased its dividends consistently for the last 25 years.
Is Archer Daniels Midland the best pick among peers?
At the current trading price of $32 per share, the total market cap of Archer Daniels Midland is around $21.1 billion. The market is valuing the company at around 10 times EV/EBITDA. Compared to its peers including Bunge Limited (NYSE: BG) and Ingredion Incorporated (NYSE: INGR), Archer Daniels Midland seems to be reasonably priced. Bunge Limited, at $73.15 per share, is worth nearly $10.7 billion on the market. The market is valuing the company the most expensive at nearly 11.1 times EV/EBITDA. Ingredion, with $5.13 billion in total market cap, is the smallest company among the three. At the current trading price of $66.60 per share, Ingredion has the cheapest valuation, at 6.8 times EV/EBITDA. Income investors might love Archer Daniels Midland the most; it has the highest dividend yield of 2.2%, while both Bunge and Ingredion are paying the same dividend yield of 1.4%.
However, Ingredion seems to be the best pick now. In addition to the cheapest valuation, the company seems to be much more profitable than Bunge and Archer Daniels Midland. Over the past twelve months, it generated an 11% operating margin whereas the operating margins for Archer Daniels Midland were only around 2%.
Foolish bottom line
With a market-leading position, ample leverage, reasonable valuation and highest dividend yield, Archer Daniels Midland fits well in the income portfolios of long-term investors. However, I prefer Ingredion to Bunge and Archer Daniels Midland due to its lowest valuation and highest margin.
hoangquocanh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!