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Bull/Bear Report -- Archer Daniels Midland -- Harvest of Profits Ahead?
The pickings for this week's bull/bear column were a bit slim, although I do have one bull and one bear opinion to share. Keep in mind this column is all about you.
I'm simply the mediator. I'll keep throwing out stocks that I believe are topical, but I need your opinions to make this column work.
I was hoping this week's selection of Archer Daniels Midland (ADM) would spur lots of conversation. After all, the agriculture space has been on fire over the last year with no end in site. Of course all good things must come to an end, hence my thought that now would be a good time to take up an analysis of ADM.
Recently we discussed companion stock, Potash (POT). My feeling on that company was that despite the run, more gains could be had given the demand for food and alternative energy product.
Ooops. Since hitting a high of $215, POT has taken a decided step back and now trades for about $175 per share.
Does that mean the run in agriculture is done or is the recent selling simply a breather?
Yet again, the InvestorPlace Blogs Community couldn't come to a consensus on this one.
Find out how the votes came down when you continue reading this week's Bull/Bear Report.
Certainly there are things to be concerned about. The popularity of ethanol may be waning just as farmers ramp up production of corn. The environmental impact of corn has become a question mark even though oil prices sky rocket.
What gives?
No doubt ADM benefits from increases in ethanol usage, but those benefits could be dissipated as more attractive forms of alternative energy take hold. That being said, a booming world economy has increased demand for food and that benefit does not appear to be in any danger.
How it all shakes out is anyone's guess. As the battle regarding ethanol continues investors need to know if owning ADM makes sense.
As I wrote regarding POT, the demand for food has as much to do with rising agricultural products. Feeding the world should keep ADM on the upswing for some time to come. More importantly ADM is a great hedge against a recessionary economy.
In my Rational mind, I would use the recent selling in ADM to establish a position. At least that's my opinion. Here are yours:
The Bull Case - Don Barrett
Archer Daniels Midland is a corporation that a lot of people are not familiar with, but ADM is a company that has an impact on the lives of many. ADM is the world's largest producer of corn-based ethanol. And if you aren't burning their ethanol fuel, there's a good chance something you consume today may have passed through the ADM supply chain.
ADM stores, transports and markets a wide range of agricultural products.
ADM operates in 3 main areas, oilseed processing, corn processing and agricultural services. The oilseed division processes oils from soybeans, corn, canola and flaxseed into vegetable oil. The corn division operates in wet and dry milling. The divisions deliver corn meal, syrup, starch and sweeteners. The agriculture services division procures, stores, cleans and transports corn, wheat, milo, barley and oats and processes the grain for marketing.
ADM earnings are like the company, nothing flashy, just steady gains in profits and share price. A 5 year chart will show ADM has gone from a $10 stock to it's current price of $47.31 which is near its 52 week high of $48.95.Fourth quarter 2007 earnings had a mixed results with a 50% increase in sales to $16.5 billion, but a 10% gain in net revenue to $473 million or .73 cents a share which was below wall streets forecast of .74 cents.
ADM is a stable company in an expanding market.
Love it or hate it, ethanol will be around another year or two at least. Their exports and domestic sales are going to increase as the worlds population grows and I think they could have tremendous growth in exports. Share prices should continue to grow and their earnings will follow suit and they pay a 1.1% dividend which should grow as earnings do.
My advice is to buy ADM stock, go to the mail box and get your dividend checks and sleep at night because this company is solid.
The Bear Case - Ahknaten
Ahknaten isn't mincing words when it comes to his opinion on the stock this week. He's bearish on ADM, and he's got stats to back it up.
Today the earnings came out for ADM, and so I'll give you my opinion - short.
Following my traditional method of analysis, I look at these stories:
Value - Nice low PE and price/book, but poor price/cash flow. My conservative valuation gives me a price target of $33. Short
Growth - Nice sales growth (not too low, not too high), and nice positive (increasing) earnings momentum. Long.
Smart money - Nice low short interest, but the insiders are selling, that's not good. Short.
Quality - High accruals. Short.
So, perhaps ADM would be fitting for a growth fund, but if I was pitching this for a value/blend/smart money/quality fund... I'm sorry, short ADM.
There were the two sides of this Bull/Bear story. As I said, the pickings this week were slim, but these are two good opinions on ADM. The story could go either way, but I would still think that ADM is a strong candidate for a defensive portfolio.
If somehow the ethanol debate favors the farmers, ADM could be a huge growth story. That would be an added benefit and not expected.
Remember to share your views on next week's stock of the week, Ford (F)
Jamie Dlugosch
Executive Editor, InvestorPlaceBlogs
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