This is just a brief follow up on my ADM post a few years ago. With time and additional purchases, it grew to one of my largest positions and therefore I think it’s about time to review the position again.
ADM is a global agricultural company with a long-term strategy focusing on optimizing their portfolio, driving efficiency and expanding strategically.
Source: ADM Investor Presentation
They are growing with acquisitions which drives revenue but also their goodwill on the balance sheet.
Source: ADM Investor Presentation
The management aims a ROIC of 10% by 2024 – if reached then it’s a good investment but first they need to get there from currently 7.7% which was achieved over a period of 7 years from 2013 6.6%. this means they need to improve by 230 basis points within the next 3.5 years which seems very ambiguous considering their previous performance improvement.
The key figures:
Share Price 18.04.2021: USD 59.45
Market Cap: $ 33.2B
Enterprise Value: 43.6B
Price/Book: 1.66 > on higher end on historical measures
P/E 2020: 18.87 and Forward P/E: 15.55
Shiller P/E: 20.77 > above history but below market (S&P 500 Shiller P/E:37.06)
Price/Cash Flow: 18.2 > Low cash flow
EV/EBITDA: 13.64 > Pricey
Current Ratio: 1.5
Quick Ratio: 0.86
Dividend Yield: 2.44% (Payout 0.46); Dividend: USD 1.48; Dividend Yield on Cost (Purchase Jan. 2016): 4.7%
Dividend Growth 5 Years: 5.2% > above inflation
ROIC: 7.7% and WACC: 5.75 > shareholder value creation
Beta: 0.92 > lower volatility than market
ROE: 9.16
ROA: 3.83
Piotroski F-Score 5
Altman Z-score 2.89
Financial Strenght 5 of 10
Profitability Rank 6 of 10
Valuation on Gurufocus 5 of 10
Price Graham Number: 1.38 > implies overvaluation on a no growth basis.
Gordon Dividend Growth Model (Fair Value): USD 73.2
Discounted value based on EPS 21e 3.88 and discount rate of 10%: USD 64.45. Approximately 9% undervalued for an expected annual return of 10%.
Additional catalysts would be an increase in share buybacks and strong dividend increases supported by robust earnings growth. I don’t see another dividend increase this year following their pattern of one increase per year at the beginning of the year. ADM’s outstanding shares reduced by around 1.5% annually.
My current return for the purchase in 2016 is approximately 18% annually (15% capital return yearly plus 3% dividend).
Positives:
– It’s in a cyclical industry (commodity) but still defensive business model (consumer defensive).
– High quality company with long history.
– Tailwind for commodities which bottomed on their cyclical down trend in 2020 and the potential of inflation picking up.
– Dividend Aristocrat – Growing dividends for 45 consecutive years.
– Strong growth driver nutrition business.
– Open job positions suggest continuous organic growth anticipated by management.
– Experienced and diverse leadership team with proven track record.
– Global company (200 countries served) and therefore benefiting from growth in emerging markets.
– Lower valuation vs. S&P and Beta of 0.92 suggest a defensive character which can be useful in a richly valued market.
Negatives/Risks:
– Low Margin and capital intense business. Low free cash flow.
– Insider Sales are increasing and at a very high level. CEO compensation is not in line with earnings development and above average for companies of similar size.
– Fairly valued – with factor 10 on EPS discount model – Negative as I prefer undervalued companies which offer an expected annual return of more than 10% or an higher margin of safety. This means I wouldn’t buy it at today’s valuation.
– Slow growth.
– Low ROIC.
– Currently at higher end of valuation metrics on historical comparisons for P/E, Shiller P/E; Dividend Yield, EV/EBITDA; P/B.
Conclusion:
Hold (for now with tendency to reduce) > Let winners run.
– Quality company with good momentum.
– Cyclical commodity tailwind should support potential earnings surprises resulting in additional share price appreciation.
– Awaiting Q1 Earnings.
– Current share price offers an annual return of 7-10% for long term investors with a time horizon of 5-10 years.
Disclosure: I’m long ADM. No investment advice.
Recent Articles/Analysis:
https://seekingalpha.com/symbol/ADM
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