Recently our good buddy Winston mentioned a few stock ideas in a discussion about Walgreens. He mentioned that Archer Daniels-Midland (ADM: chart, web, Y!) was his buy-it and forget-stock. So I thought I’d dig into the numbers a bit to see if I agree.

Archer Daniels procures, transports, stores, processes, and merchandises agricultural commodities and products primarily in the United States. They operate in three segments, namely oilseeds and corn processing, and agricultural services. Effectively they refine seeds and beens into vegetable oils for the food (i.e. salad dressing) and feed industries.

The AG-services side of the company engages in buying, storing, cleaning, and transporting agricultural commodities, such as oilseeds, corn, wheat, milo, etc, and reselling these commodities to the agricultural processing industry.

An interesting, yet lightly publicized aspect of Archer Daniels is their interest in processing corn. For those of you who regularly read The Corner Office Blog, you know that I view the ethanol boom as nothing more than a farce. However, if you can make money in the face of a farce, by all means, run with the bulls!

Financial Summary

For the most recent quarter, Archer Daniels first quarter (FY08) net sales increased to $12.83 billion, up 35.8% from $9.45 billion for the same quarter in FY07, stimulated by commodity prices, and strong product demand in processing and AG-services segments. Oilseeds Processing sales increased 42.4% to $4.61 billion, boosted by higher prices and volumes due to strong demand for vegetable oil and soybean meal, and the higher average selling prices of fertilizers and oilseeds exported from South America. Corn Processing sales increased 12.6% to $1.52 billion, due to higher average selling prices in sweeteners and starches despite lower sales volumes and lower average selling prices for ethanol, whose current capacity exceeds customer demands.

AG-services sales increased 39.4% to $5.54 billion, also stimulated by higher commodity prices and increased sales volumes. Commodity market prices of corn, soybeans, and wheat increased approximately 44.0%, 36.0% and 26.0%, respectively, from market price levels a year ago.

Gross profit margin declined 228 basis points to 8.69% from 10.97% a year ago. The cost of products sold jumped 38.7% to $11.90 billion, due to higher agricultural commodity prices and increased sales volumes. Manufacturing costs increased $52.00 million, due to increased employee-related costs, and higher plant maintenance and depreciation costs. Operating margin also contracted 139 basis points to 4.49% from 5.88%.

ADM pays a $0.115 per share dividend, and the company recently bought back 1.84 million shares for roughly $32.63 per share.

Insider Activity

There has been a healthy dose of insider selling going on in the last couple months, which isn’t really a strong indicator of how well insiders think the company will do in the future. Remember, insiders sell for many reasons (hey, they gotta pay the bills too), but they only buy for one.

Industry Peers

There are a couple key players in the farm products industry. Bunge Ltd. (BG: chart, web, Y!), Cargill, and Corn Products International (CPO: chart, web, Y!) are probably the closest to ADM when comparing technicals. Cargill is a privately held company that is nearly twice as large as ADM in terms of revenue, but on nearly equal ground when looking at net income. Cargill also has significantly more employees, hence more overhead and less net income.

ADM has a P/E ratio of 11.49 as compared to 18.93 for Bunge and 16.13 for CPO.

Operating margins for Archer (4.4%) are nearly double that of Bunge (2.8%) but not quite as healthy as CPO’s 9.9% margin.

The Corner Office Thoughts

I think Archer Daniels is a fairly safe bet considering the stability of our current economy. They’re in a industry that is fairly insulated to drastic swings in economic sentiment, as their products will be in demand regardless of how Bernanke and Company screw things up. The fact that they are truly a global player in the farm and food industry makes it look that much more attractive.

They do have significant risk in that their overall financial health is tied largely to commodity prices, but in this day in age, this is fairly common. I don’t see the grain markets falling through the floor anytime soon. I like the fact that they are taking part in the ethanol boom, but don’t have such a large part of their business plan at risk when the boom turns bust.

Currently, I’m still in a wait and see mode, but I’ll take another look at ADM when things start to calm down a bit. As I mentioned the global exposure that this company delivers is very appealing.

All in all, I think Winston is right, this could be a good candidate for a buy-it and fagedaboudit stock…

Tags: ADM | archer daniels | food and grain | grain processing | Stock Thoughts

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