Archer Daniels Midland Pivots Toward the Future of Foods and Beverages

Archer Daniels Midland Company (NYSE: ADM  ) took a big step by diversifying its operations and adding a business with higher margins than its traditional and low-margin agricultural commodities business. The company's acquisition of Wild Flavors, a Swiss company that specializes in producing food flavorings and colorings derived from natural sources, will supplement its core business of producing the core ingredients for many other companies' foods and beverages .

Foraying into the natural flavorings and colorings market is important for Archer Daniels Midland as consumers have demanded natural, healthier foods and beverages at an increasing pace. Consumers are becoming more health-conscious, so adding Wild Flavors to its operations will help Archer Daniels Midland capitalize on the current trends in eating and drinking and prepare it for the future.

Is Archer Daniels Midland a good investment?
Archer Daniels Midland competes with many different smaller and larger companies, and its largest competitor is the privately-held Cargill. Its publicly traded competitors in the agricultural commodities business include Bunge Limited (NYSE: BG  ) and Ingredion (NYSE: INGR  ) . So how does Archer Daniels Midland compare to Bunge and Ingredion on a valuation basis?

 

P/E

Forward P/E

5-yr. PEG

P/CF

Archer Daniels Midland

23.2

13.8

1.5

6.7

Bunge Limited

341.8

10.6

1.6

10.6

Ingredion

17

12.9

1.7

7.7

Data Source: Yahoo Finance & Morningstar

The S&P 500 currently trades at a P/E of about 18.6, so Ingredion is the only one of the three companies that trades at any discount to the market on a P/E basis. Still, Ingredion's P/E of 17 is not much of a discount and Archer Daniels Midland's P/E of 23.2 is not an exorbitant valuation given good growth prospects. Archer Daniels Midland's acquisition of Wild Flavors gives some foundation to its valuation on a P/E basis as it will add some growth immediately and could add even more growth in the future.

Bunge Limited's high P/E of 341.8 is a result of the company reporting a loss in its 2014 first quarter of $0.12 per share compared to income of $1.15 per share in the 2013 first quarter. The company attributed the loss to adverse temporary conditions in its grain trading and distribution business along with depressed conditions in China .

All three of the companies have attractive valuations considering their estimated earnings for the next year. Bunge Limited's forward P/E of 10.6 is the most attractive, but Archer Daniels Midland and Ingredion are not far behind with forward P/E ratios of 13.8 and 12.9, respectively. Looking out even further over a period of five years and considering the earnings estimates over that period, the three companies have more or less the same valuation. Their five-year PEG values are all over one, so they do not look overly attractive on this basis but are not exorbitantly valued either.

Archer Daniels Midland looks particularly attractive on a cash flow basis with a P/CF of 6.7. The S&P 500 trades at a P/CF of 11, so Archer Daniels Midland's P/CF is a significant discount to that of the market. Ingredion is not far behind on cash flow, however, with a P/CF of 7.7, and Bunge Limited is about in line with the market on its P/CF.

Foolish Takeaway
Wild Flavors is small compared to the rest of Archer Daniels Midland's business but it could grow significantly over time and increase the company's margins and profits. Along with the company's fair overall valuation and attractive valuation on a cash-flow basis, Archer Daniels Midland looks like a solid investment in an industry that technology will not revolutionize. Foods and beverages will always need their flavors and colorings, and Archer Daniels Midland is positioning itself for a more natural food and beverage environment and aligning itself with present and future trends.

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