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Investors in Archer Daniels Midland (NYSE: ADM ) had a great 2013 as shares have risen some 50% over the past year. The focus to create shareholder value, combined with better prospects for crop growth have resulted in great investor enthusiasm for the shares.
Stifel Nicolaus Is Cautious
At the start of 2014, analysts at Stifel Nicolaus initiated their advice on Archer Daniels with a "Hold" rating.
Analyst Paul Massoud believes that the company is entering a more favorable operating environment in 2014, which is already priced into the shares. Massoud notes that shares have seen impressive gains over the past year, comfortably outperforming the S&P500.
Strong US crop production with subsequently lower prices should boost processing margins. The global footprint of the company is a great asset, allowing the firm to source crops from surplus producing countries to those short on supply.
The current valuation at 8.3 times 2014 EBITDA is close to peak year valuations according to Massoud. For 2013, Stifel now sees full year earnings of $2.27 per share on EBITDA of $3.1 billion.
Operating Performance And Archer's Financial Performance
In October, Archer Daniels released its third quarter results.The company ended the quarter with $3.49 billion in cash and equivalents, giving the company a lot of liquidity and financial flexibility. Total debt stands at $6.88 billion, resulting in a net debt position of $3.39 billion.
Revenues for the first nine months of the year came in at $65.66 billion, unchanged from last year. Earnings rose by 11.9% to $968 million, putting Archer Daniels on track to earn around $1.5 billion for 2013.
Trading around $44 per share, the market values Archer Daniels at $29 billion. This values equity in the firm at 0.3 times annual revenues and 19-20 times annual earnings. This valuation is not too compelling, especially with a lack of top line revenue growth. There are few direct competitors with a similar size of Archer Daniels with many of these companies being in private hands.
Competitor Bunge (NYSE: BG ) trades at 32 times reported earnings for 2012. Bunge took $514 million in "unusual" expenses for the year. Adding them back to earnings, while correcting for taxes, values this player at 16 times earnings for 2012. This "disparity" in valuations is the result of momentum in shares of Archer Daniels, while Bunge's share price has only risen some 10%. So while Archer Daniels is valued a little rich, shareholders do receive fair payout yields. Earlier this month, Archer Daniels raised its quarterly dividend by 26% to $0.24 per share, providing investors with a 2.2% dividend yield.
Some Historical Perspective
Long term investors have seen fair return with shares showing a high correlation to agricultural prices. Shares fell hard during the recession, but recovered nicely, especially last year with shares trading around $42 per share.
Over the past four years, Archer Daniels increased its revenues by some 45% to $90 billion. Strong cash flow generation reduced the net debt position by $4-$5 billion over the past year to $3.4 billion at the moment. This allows Archer Daniels to expand by acquiring other businesses. This path has not gone smooth in recent times, with Australia now blocking the proposed $2.7 billion acquisition of GrainCorp.
Takeaway For Investors
The company remains committed to focus on shareholder value which should be achieved through improved returns on invested capital, earnings growth and a strong strategy. The company is focusing on improving returns, which have been low in recent years and missed the company's internal unspecified targets. Underproduction of crops, especially related to droughts are impacting returns.
Previously, Archer Daniels saw its earnings plateauing at $3.00 per share, or around $2 billion. With the focus on cost reductions, cash preservation and capital usage, the company feels it is able to report results exceeding these expectations in a good crop season. For 2014, it sees record corn oilseeds and wheat production.
Seeing earnings of $2.5 billion being sustainable two years down the road, the valuation at 11-12 times earnings makes shares quite appealing. Unfortunately for prospective investors, shares in Archer Daniels had a great run in 2013. This led to multiple expansion and limits the appeal based on the valuation at this point.
Therefore I remain on the sidelines for now, but remain optimistic in the long term.