Archer-Daniels-Midland (NYSE:ADM) is a leading global food processor with a diverse portfolio that promotes health and wellness for everyone and distributes its products globally with the mission of enabling nature’s power to improve people’s quality of life. This fiscal year 2022, management viewed the company as a better ADM and set out to capitalize on opportunities created by its “favorable global demand environment”. It offers attractive long-term investment opportunities for investors seeking consistent cash flow, a strong balance sheet, and a reliable dividend. ADM is an attractive investment which offers both sound fundamentals and a better entry point in its potential pullback.
ADM 2.0: Unlocks Sustainability In Wellness
The management saw eight global consumer trends that will shape ADM’s future growth, as can be seen in the graphic above, unlocking growth in all of its three reportable segments: Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition. Their long-term strategy is to have sustainable growth through innovation and productivity. ADM expects for another positive performance in 2022 and predicts a ‘Better ADM’ in response to growing market demand.
ADM generated an outstanding revenue growth of 32.47 percent to $85,249 million from $64,355 million last year. All of its reportable segments mentioned above have seen a YoY growth of 35 percent, 31 percent and 16 percent respectively. According to Ray Young, the Executive Vice President and CFO of ADM, its AG Services and Oilseeds segments posted impressive results this year.
The ag services and oilseeds team capped off really a truly impressive year, successfully navigating through supply chain challenges to deliver results largely in line with the extremely strong prior year quarter. The ag services team performed well in an environment of continued strong global demand, including significantly increased export volumes for customers outside of China. Global trade was substantially higher year over year, driven by solid risk management and improved results in global ocean freight. Overall, ag services delivered strong results just slightly off the outstanding fourth quarter of 2020, when we benefited from exceptionally high export margins.
Despite a lower processed volume as of today, ADM generated a higher revenue than it did in 2019, totaling $64,656 million, with an operating margin of 3.47 percent in 2021, up from the current 2.45 percent in 2019. Additionally, it increased its bottom line by 53.48 percent year over year to $2,709 million from $1,772 million last year. ADM closes its fiscal 2021 with a stronger performance than during the peak of the pandemic, which most analysts think that its current figure will be challenging for its succeeding financial report. This, in my opinion, might be a red flag for some investors and a risk worth considering.
Enjoys A Long-Term Positive Outlook From Its Management
ADM planned to achieve sustainable growth through productivity and innovation. The management expects a single digit growth in 2025 which is a bit high with the forecasted figures of the analysts. They projected a revenue growth of 0.30 percent, 0.81 percent, negative 5.79 percent, and 2.78 percent for the year 2022, 2023, 2024 and 2025 respectively. However, looking at the projected EPS by the management in 2025 to be in between $6 to $7, this is a huge jump from its $4.79 EPS in 2021.
ADM creates value through its sustainable ecosystem. They are able to provide strong value for their customers by providing competitive pricing, while managing to expand its gross margin for the past five years. The company also benefits from a stronger demand from the global wellness market, which is expected to reach $7 Trillion in 2025. ADM expects its Nutrition segment’s operating income to be in between $1,250 to 1,500 million in 2025, a huge jump as well from its 2021 figure amounting to $691 million. According to management, they are prepared to capitalize on the growing demand for healthy living, as quoted below:
We also continued to enhance our nutrition business with strategic investments targeted at growing areas of demand, including soy protein which will expand our participation in alternative proteins; PetDine, which substantially enhanced our presence in pet food and treats; Deerland, which continued the expansion of our functional probiotics and enzymes portfolio within our global health and wellness business; and FISA, which enhanced our flavor footprint by opening up new growth opportunities in Latin America and the Caribbean.
Lastly, ADM enjoys an outstanding potential growth in its economic value profit (EVA), as provided in the image above. The management expects its EVA to reach $1 billion in 2025, five times better than its 2020 amounting to $201 million at 7 percent weighted average cost of capital. In my opinion, if they can maintain their current capital investment level of $31,348 million in 2025, ADM should generate a positive net operating profit after tax of $3,194 million in 2025, up from $2,377 million in 2021.
Unlocks Thin Upside At Today’s Price
At today’s price, ADM provides a thin upside of 7 percent with an average fair price of $80.6 based on a five year DCF model and simple relative valuation. On the brighter side, it generates a cheaper forward P/E of 14.70x when compared to its trailing P/E of 15.81x and to its sector average of 22.71x. Its trailing EV/EBITDA multiple of 13.11x is also cheaper when compared to its forward EV/EBITDA of 10.62x and is fairly valued when against its sector’s average of 13.31x.
I completed my DCF model using the forecasted revenue by the analyst. It provides a slower growth than what the management expects. I expect a growing operating income as ADM focuses on its organic growth and with a clear plan towards sustained growth through productivity. Additionally, management forecasted positive operating income for all of its segments except Carbohydrate solutions, which is expected to generate lower operating income than in 2021. On a lighter note, the management provided a higher capex spending guidance to cater organic growth and overall productivity.
I used a 7 percent long-term target WACC provided by the management as our discount rate. However, I calculated its current WACC of 5.82 percent seen in the graph above. I believe this model is conservative compared to the management’s outlook of single high digit growth through 2025 and compared to its long-term goal WACC. With an estimated 7 percent annual revenue growth and a discount rate of 5.82 percent, ADM offers a 25 percent upside potential as of today with an average fair price of $94.8.
All-Time High, Potential Pullback
ADM is currently exhibiting weakness following the breakout of its $71 level on January 26, 2022. Currently, its three simple moving averages align in bullish fashion, while its MACD indicator shows potential weakness at today’s price as well. If there is a pullback, the previous breakout point and the $67 area, as well as the bounce on its simple moving averages, will be good zones to enter.
ADM prioritizes value creation through deleveraging and sustained dividend growth. On top of that, the management has a long term goal to buy back its own shares worth $5 billion. It currently has a declining trend in its net debt, which is $8,596 million, better than the $10,341 million and $9,065 million for 2020 and 2019 respectively. ADM reduced its short-term borrowings to $958 million from $2,042 million last year, resulting in a current ratio of 11.99x, which is significantly better than the previous 1.50x. Looking at its debt/equity ratio of 0.42x, which is up from 0.55x last year and 0.51x in 2019, ADM, in my opinion, remains liquid as of today.
One of the interesting catalysts about ADM is its dividend yield of 2.11 percent amid all-time high settings. With a payout ratio target of between 30 percent and 40 percent in 2025 and a strong free cash flow generation, combined with a long-term goal of deleveraging, I believe the company can sustain another three years of dividend growth. ‘Better ADM’ provides a better upside potential on its potential drop.
Thank you for reading and good luck to us all this month.
This article was written by
Hi there! I am an equity research analyst by profession but a trader by heart, with a background in accounting. I try my best to be a responsible investor, guided by my expertise in fundamental and technical analysis. I enjoy surfing and riding the trends about equity, currencies and cryptocurrency. With a little over 5 years of experience in the market, I enjoy keeping my mind open to fresh ideas from different investment viewpoints since it allows me to expand my knowledge in this wild, but always energizing investing industry. PS. I apologize if I am unable to respond to your feedback immediately. However, when I have free time, I read through it all and enjoy reading both positive and negative feedback. Thank you!
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in ADM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.