Is Archer-Daniels Midland Stock A Buy?

Archer-Daniels Midland Co (NYSE:ADM) is a global agricultural logistics and raw materials processor. It also has a solid dividend payment history going back almost 90 years. The company braced for the coronavirus well in advance, although CEO Juan Luciano pointed out that trading grain on a global scale won’t be affected.

Food is a staple in everyone’s life, but is Archer-Daniels Midland stock a Buy?

The food industry certainly was impacted by COVID-19. It caused dairy farmers to dump milk, produce to go bad, and major problems in the global supply chain.

Restaurants and major events closing created complete chaos for a time. But Archer-Daniels Midland quickly rebounded because it’s so high up the literal food chain.

The company processes bulk oilseed, corn, and other food ingredients for humans, animals, and even biofuels. It also provides financial services for food industry and agricultural partners. These extensive revenue streams give it exposure to not only survive a rough economy, but also find growth opportunities.

It could be overpriced though, if it can’t find ways to scale what’s already a large global operation. Let’s run against the grain to see what this century-old Minneapolis, Minnesota-based company.

ADM Is Integral To Global Supply Chain

Archer-Daniels Midland is a global agricultural and food processor founded in 1902 that serves major food manufacturers around the world. Because it’s involved in the global supply chain, it has a comprehensive R&D network, online platform, and logistics technology.

The company works closely with farmers and others in the agricultural industry and is a member of over 200 trade and business associations. It deals with commodities markets, which can be turbulent, regardless of a global pandemic, and it did take some losses as the economy slowed down.

Because it produces raw ingredients, it has a stable financial history. But it also creates a lot of synthetic and artificial ingredients like food coloring and sweeteners that are falling out of style with consumers. It will need to continue pivoting to navigate through tougher markets ahead.

Still, it has a robust lead in a market with a high barrier to entry. The startup costs alone are enough to keep most competitors at bay. It also benefits from farm subsidies, which will certainly help it maintain through unstable economic conditions over the next five years.

Is Archer-Daniels Midland Stock A Buy?

Archer-Daniels Midland shareholders have a lot to be thankful as it hovers around a record $28 billion market capitalization.

Its stock price dropped to a 52-week low of $28.92 when markets tumbled, only to recover to highs around $50 per share, a price that it hasn’t reached since 2018.

The company also approached this level in 2008, before it experienced a dip during the foreclosure crisis. This drop was more significant than the most recent stock market dip, although it is fully recovered from the financial impact.

ADM generated $64.66 billion of revenue in 2019, and it has $46.38 billion in the first three quarters of 2020, in spite of a worldwide economic slowdown.

It’s going to fall short of last year’s revenues, but not by much. And it adjusted overhead to gain income. Operating profits in the third quarter were $849 million, up 11 percent from the same quarter in 2019.

Its dividend yield for the year was $1.44, up from $1.40 in 2019. That equates to a 2.85 percent annual dividend yield with a P/E ratio of 17.83 percent. While these numbers may look attractive, there are risks associated with the company.

Archer-Daniels Midland Stock Risks

The biggest issue in the company’s business model is that it relies on unstable commodities prices. Overhead costs and margins can be difficult to maintain when operating in such a turbulent pricing situation. Building a business on commodities is as much of a roller coaster as cryptocurrency these days.

On top of price volatility, it was already facing changing consumer needs through the past decade. The company creates a lot of artificial sweeteners, flavor enhancers, preservatives, and other food ingredients that are out of date in the modern market. Some people won’t even feed such products to their pets.

This puts the company in a precarious position that it may not notice until it’s too late. If grocers can’t move the products, they go back, and it can find itself squeezed for profits. Energy prices could skyrocket while food prices plummet.

Sooner or later, someone could be stuck holding a bag of useless bulk ingredients. And just because there’s a high barrier to entry doesn’t mean the company is without competition.

Can Archer-Daniels Midland Competitors Win?

The bulk food supply chain is a large market that includes a variety of competitors. Cargill, Del Monte, Tyson Foods (TSN), Cargill, Bunge, and Tate & Lyle all have an interest in consumer staples. The holiday season and winter are big for grocers, and each supplier needs to provide.

A lot of government stimulus programs expire in 2021, and it’s unclear how this pandemic and shutdown will affect consumer buying habits in the long term.

ADM has great logistics, but so do a lot of other companies. It will need to remain lean and expand through acquisitions to stay competitive in this brutal market.

Is Archer-Daniels Midland Stock a Buy? The Bottom Line

Archer-Daniels Midland is a global food and agricultural company based in Chicago, Illinois. It’s over a century old and deals in bulk commodities, processing and processing equipment, logistics, industry financing, and more. This gives it a wide safety net to navigate a turbulent market.

And the market will be turbulent, despite the company’s CEO insisting otherwise.

Even food staples like soy beans can take a price hit that cuts into profit margins. And widespread bar and restaurant shutdowns will inevitably affect vegetable and grain farmers just like it did the meat and dairy industries, and crude oil. That’s not even counting the ADM employees who tested positive for COVID-19 in 2020.

If the company can effectively transition to evolve with consumer eating habits, it could provide a generous ROI to investors. However, it could also be inflated and plummet again next year when the foreclosures and evictions hit. Invest with caution.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.