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Archer Daniel Midland:
Agricultural Giant On Sale

Archer Daniel Midland (ADM) is a basic material agricultural firm caught up in the political drama of the ongoing trade spat. The current share weakness caused by trade and agricultural uncertainties offer new investors both a reasonable capital gains potential and an acceptable, and growing, dividend, notes George Fisher, editor of Guiding Mast Investments which focuses on equities exhibiting the best current longer-term value while minimizing risk, www.GuidingMastInvestments.com.

ADM is organized into four reportable business segments: Origination, Oilseeds Processing, Carbohydrate Solutions, and Nutrition, described below:

• Origination (39% of FY 18 revenue) which includes its US grain elevator, global transportation network and port operations to buy, store, clean, transport, and sell agricultural commodities.

• Oilseeds Processing (39% of FY 18 revenue), which includes global activities related to the origination, merchandising, crushing and further processing of oilseeds;

• Carbohydrate Solutions (16% of FY 18 revenue) is engaged in corn and wheat wet and dry milling and other activities. This is where ADM’s ethanol fuel businesses reside.

• Nutrition (6% of FY 18 revenue) engages in the manufacturing, sale, and distribution of specialty products including natural flavor ingredients, sweeteners and health ingredients. Soybeans, soybean meal, and corn accounted for approximately 42% of total revenue. Other important agricultural commodities are oilseeds, wheat, milo, oats, rice and barley.

Archer Daniels Midland quarterly profit plunged over 40% due to a confluence of events including the ongoing trade war with China and terrible weather throughout the Midwest. As agriculture has been in the crosshairs of trade discussion and actions, and as ADM is a agricultural firm, it is expected that the current weakness in agricultural commodities will negatively affect AMD, and that potential weakness is currently reflected in lower share prices.

ADM is bouncing around the lower end of its 5-yr. trading range of just over $50 and just under $35. In addition, the current yield is 3.5%. The last time ADM’s dividend yield exceeded 3.5% was between Dec 2015 and April 2016.

The 800-lb elephant in the room is the Chinese market for US agricultural goods. CFRA recently reported in a bullish review, we believe U.S.- China trade talks are in the final laps and a deal will result in more exports of soybean and ethanol to China. China is preparing for its 10% ethanol in gasoline by 2020 mandate, so we think China will need to import a significant quantity of ethanol to meet increased demand. We also think soybean consumption in the U.S. and other international markets will increase to satisfy the hog deficit in China (China’s hog herd has been slashed by 20% due to African Swine Fever).

However, not everyone is sold on AMD’s turnaround. Credit Suisse’s has been Neutral on the stock since 2016, and in its most recent review states: Outlook for 2019 looks increasingly out of reach. Given the slow start to the year from weather conditions and margin erosion in ethanol, the back half now requires an even bigger recovery than previously assumed and has become highly dependent on factors out of ADM’s control. This includes (1) a positive outcome in U.S. trade negotiations with China, leading to stronger corn and ethanol exports and stronger margins at grain elevators; (2) a spike in demand for soybean meal as global swine producers increase production to compensate for the swine fever outbreak in China’s pig herd; (3) strong crush margins for ADM under the assumption that China accelerates exports of corn and protein rather than the soybeans themselves; and (4) improving margins for ethanol during the summer due to seasonal demand.

In response to the volatile environment, management is 1) transitioning HFCS production at its Marshall, MN facility to industrial starch; 2) spinning off its dry mill ethanol plants into a stand-alone subsidiary; 3) raising its cumulative 2020 cost savings target to $1.2 billion from $1.0 billion and its 2019 target this year by $50 million. This implies that 2020 savings will double to $600 million from 2018 and 2019’s $300 million run rate.

Insiders are buying stock at current levels. Recently, the agricultural giant's CEO and chief financial officer both swooped in to buy shares, their first buy since late 2015 and late 2018, respectively.

Management has announced it was looking into the possibility of spinning-off or selling its ethanol business. As a precursor to this, ADM is establishing its ethanol business as a stand alone subsidiary, making final disposition easier.

Ethanol industry consolidation is clearly part of ADM’s long-term plan for the business.

Driving ethanol’s realignment and weak performance is the underlying statistic that ethanol prices are down 42 percent in the last five years.

With the cyclical nature of agricultural and commodity stocks, buying when the market sees uncertainly is an excellent method of building positions in these potentially volatile companies. As one of the largest global agricultural businesses, ADM’s current uncertainty provides a respectable buying opportunity for patient investors, especially with a 3.5% dividend yield and divvy growth of 6%+ a year.

Editor’s Note: Guiding Mast Investments newsletter, 1 year, 12 issues, $85, 10 Forest Ave., Saratoga Springs, NY 12866, www.GuidingMastInvestments.com.

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