Earlier this year, I spent some time dissecting Benjamin Graham's The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: multiply earnings per share by book value per share, then multiply that by 22.5, and finally, take the square root. The result, in dollars, is the Graham number.
However, a quick check can help determine whether or not a company might be worthy of a look using the teachings of Graham. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15, and P/B of 1.5. With that in mind, I looked at the stocks of the S&P 500 that exceeded a P/B of 1.5, but still met the ideal situation mentioned above. Currently, there are 68 companies in the index that meet these criteria. I will be making a CAPScall on these companies after comparing them to competitors, and their current value in relation to their Graham numbers. Up next is food producer Archer Daniels Midland
Who are they?
You may have heard of Archer Daniels Midland before, but there's a chance you don't know what they do. On a basic level, they process crops like corn, cocoa, wheat and other crops into various products used by multiple industries. It is one of the leading producers of corn-based sweeteners, like high-fructose corn syrup, and it is viewed as the world's premier cocoa and chocolate manufacturer.
With a drought wreaking havoc across much of the country, Archer Daniels Midland was recently downgraded by analysts due to an expected pinch in margins for high-fructose corn syrup. Furthermore, its Crop Risk Services business, which insures farmers against lower crop yields due to drought and other natural reasons, could see an impact, as well. Nevertheless, there are analysts that are currently bullish on the stock, viewing the recent six-year low as a buying opportunity.
What's it worth?
For such a diversified company, Archer Daniels Midland is surprisingly cheap, though poor earnings during its recent quarter might have something to do with that. Nevertheless, it is currently below its Graham number, though some of its competitors appear to have a larger upside:
|
Company |
EPS (ttm) |
Book Value Per Share (mrq) |
Graham Number |
Recent Price |
Upside |
|---|---|---|---|---|---|
| Archer Daniels Midland | $1.84 | $27.49 | $33.74 | $26.58 | 26.9% |
|
Bunge Limited |
$4.92 | $72.41 | $89.53 | $64.37 | 39.1% |
|
Fresh Del Monte Produce |
$2.09 | $31.20 | $38.30 | $24.51 | 56.3% |
|
Tyson Foods |
$1.33 | $16.22 | $22.03 | $15.64 | 40.9% |
Source: Yahoo! Finance and author's calculations, ttm: trailing 12 months; mrq: most recent quarter
The ongoing drought also affects many of Archer Daniels Midland's competitors. Bunge is feeling the pinch of higher margins, but entered into an agreement in April to partner with Solazyme
Accountability time
A diverse group of products should help Archer Daniels Midland weather the drought, no pun intended. A stock's valuation, regardless of the method used, is but one thing to look at when evaluating a potential investment. With room to grow into its Graham number valuation, I will be placing a "thumbs up" over on my CAPS page in order to track this call and keep myself accountable.
Another famous investor in the vein of Graham was Peter Lynch. Our analysts have identified "3 Stocks Wall Street's Too Rich to Notice" inspired by Lynch's philosophy of buy what you know. To snag a copy of this free report, click here while it is still available.
