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A Food Producer for Long-Term Investors

Agriculture is a relatively unexciting industry that fulfills an ever-present and always-growing need. Fortunately for investors looking to diversify into agribusinesses, one of the largest and most successful companies in the field is available for a reasonable price. Let's take a closer look at why Archer Daniels Midland  (NYSE: ADM  ) belongs in your portfolio.

A key role in the food chain
Decatur, Illinois-based Archer Daniels Midland is primarily in the business of transforming agricultural commodities into food products and feed ingredients. The company is the world's largest processor of corn, transforming the crop into animal feed, ethanol, sweeteners, and various other culinary inputs. Archer Daniels Midland also grinds 16% of the world's cocoa crop, but the company generates just over half of its profits from processing oilseeds. The ability to transform corn, wheat, cocoa, and oilseeds into hundreds of products that help satisfy hunger led Fortune to name Archer Daniels Midland the most admired company in the food production industry for three straight years between 2009 and 2011. While the company has since been dethroned by Wilmar International (NASDAQOTH: WLMIY  ) , it beat out Bunge (NYSE: BG  )  for the number two spot. Archer Daniels Midland holds a 16.4% stake in Singapore-based Wilmar. 

Rapid debt reduction
Leadership at Archer Daniels Midland has demonstrated the ability to quickly take corrective action if debt starts getting out of control. At the end of 2011 the company had $8.27 billion in long-term debt. Its latest quarterly report shows a figure of $5.36 billion. In just under two years Archer Daniels Midland cut its total long-term debt by 35%. Its net debt position, defined as total debt minus cash & cash equivalents, has improved even more quickly. In the past year Archer Daniels Midland's net debt has shrunk from $8.8 billion to $3.4 billion, a significant reduction. Thanks to such rapid debt reduction the company will pay nearly $60 million less in interest charges this year than it did in 2011. None of these three companies have extremely high levels of debt relative to equity, as the following table shows.

Total Debt/Equity Ratio:   .35 1.14    1.8
Times Interest Charges Earned (TTM):   5.9 1.7    3.7

Note how Bunge has earned less than two times the amount it has paid in interest charges over the past twelve months. This poor coverage ratio partially results from forces management cannot control. For instance, a drought in 2012 reduced the available supply of many of Bunge's most important inputs. That being said, a company's performance during periods of adverse market conditions tells you a lot about how stable it is. Bunge's coverage ratio seems dangerously low, but Archer Daniels Midland posted a healthy coverage ratio while facing many of the same headwinds.

Beneficiary of a record corn harvest
As the world's largest processor of corn, Archer Daniels Midland is perhaps the biggest beneficiary of a bumper crop, and 2013 appears like it will be a record year for American corn production. In its recently released "Feed Outlook" the USDA projected 2013 corn production at 13,989 million bushels, 6.9% higher than the previous record set in 2009-2010. One key difference between Bunge and Archer Daniels Midland is that instead of producing sweeteners from corn, as does ADM, Bunge instead grows sugarcane and produces actual sugar. Not only do Bunge's Brazilian sugar operations perpetually lose money, they also limit the company's exposure to corn. This means that Bunge does not stand to benefit as much from a record corn harvest as Archer Daniels Midland does.

Wilmar is not involved in the processing of corn. Like Archer Daniels Midland, processing oilseeds are Wilmar's primary focus. In Asian markets for consumer-packaged edible oils, Wilmar dominates. Its market share in China is 45%, in Indonesia it is 35%, and in India it is 15%. The company's sales of flour and rice in China are growing at double-digit rates. The company is quickly growing sales and has a reasonable price to earnings ratio of 12.4. Investors who put a premium on staying power will probably still favor Archer Daniels Midland, especially considering that the company has been consecutively paying dividends for longer than Wilmar has existed.

Foolish bottom line
In a world of high-flying stock prices, many companies have become overvalued. While agribusiness hasn't been excluded from the market's rally, shares of Archer Daniels Midland remain reasonably priced. The company has managed its debt load well and delivered satisfactory results despite a weak harvest. Looking forward, the company is positioned to be a prime beneficiary of this year's record corn harvest, and it holds a sizable stake in one of Asia's most successful and well-renowned food producers. All in all, Archer Daniels Midland is an excellent choice for investors seeking to diversify into agribusiness. 

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Related Tickers

9/28/2016 4:01 PM
ADM $41.85 Down -0.04 -0.10%
Archer Daniels Mid… CAPS Rating: ****
BG $59.48 Up +0.17 +0.29%
Bunge CAPS Rating: ***
WLMIY $23.57 Down -0.05 -0.21%
Wilmar Internation… CAPS Rating: No stars