Archer Daniels: Stay Away From This Stock Until It Falls Further
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With Archer Daniels Midland (NYSE: ADM) staging a rally from its October lows, I decided to take a closer look into the company to see if it is an attractive opportunity. Here are six points I looked at while researching ADM:
Valuation: ADM’s trailing 5 year valuation metrics suggest that the stock is undervalued as they are all trading below their 5 year averages. ADM’s current P/B ratio is 1.1 and it has averaged 1.5 over the past 5 years with a high of 2.4 and low of 0.9. ADM’s current P/S ratio is 0.2 and it has averaged 0.3 over the past 5 years with a high of 0.6 and low of 0.2. ADM’s current P/E ratio is 8.8 and it has averaged 10.9 over the past 5 years with a high of 17.9 and low of 5.9.
Price Target: The consensus price target for the analysts who follow ADM is $32. That is upside of more than 10% and suggests that the stock is fairly at these levels and has little upside from here.
Forward Valuation: ADM is currently trading at $29 a share and analysts expect the company to report earnings of $2.97 this fiscal year ending in June for a forward P/E ratio of 10. Revenues are expected to jump 11%. Publicly traded comps include Corn Products International (CPO) and Bunge (BG). CPO is trading at a forward P/E multiple of 10 with revenues expected to jump 7.3%. BG is trading at a forward P/E multiple of 9 with revenues expected to rise 1.3%. It seems like ADM is fairly valued to competitors as the market is applying a similar multiple to the stock as it is applying to other related stocks.
Margins: One of the reasons for ADM’s stock struggling is weak margins for ADM’s products. In its 3Q release, the company stated that a weak margin environment for global soybean crushing and European rapeseed crushing depressed earnings. Furthermore, the increased the cost of corn has been driving corn processing profits lower. Despite the turbulence, ADM said that it sees the margin environment “improving modestly.”
Earnings Estimates: ADM beat earnings estimates the last two quarters after just meeting estimates the 1Q11 quarter. The earnings beats have been very up and down as the 2Q11 quarter the company beat estimates by 16 cents but for the 3Q11 quarter the company beat estimates by just 2 cents.
Dividend: ADM has paid a dividend since 1983. ADM’s current quarterly dividend is 17.5 cents for an annual dividend of 70 cents and dividend yield of 2.4%. The dividend was last increased late last year after the company boosted its quarterly dividend by 9% to 17.5 cents from 16 cents. The company tends to raise its quarterly dividend by 1-1.5 cents a year.
Price Action: ADM has struggled this year, trading as high as $37 in February before tumbling all the way to below $24 a share in October. Since then, the stock has staged a rally and has kept most of its gains. It is now trading at $29 a share, more than 20% off October lows. The stock is trading right near its 50 day moving average and just below its 200 day moving average, which sits at about $29.50. The 200 day moving average has served as a key resistance point for the stock over the past 8 months as it attempted to cross the level 4 times but failed. $30 is also a key resistance level. On the downside, the $27-27.50 level should serve as strong support followed by $26 and $24.
Conclusion: ADM seems undervalued on a trailing valuation basis but analysts and publicly traded comps suggest that the stock is fairly valued. I would suggest staying away from the stock at these levels and waiting until it falls and trades at a bigger discount to the analyst consensus or discount to publicly traded comps.
The Motley Fool owns shares of Archer Daniels Midland Company. Vatalyst has no positions in the stocks mentioned above. 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.