Wednesday, 4 February 2015

ADM - I think value is building at the agribusiness giant

I have never owned ADM shares but I keep on looking at the stock as I regard any agricultural trading and related company as thematically interesting. A few months ago after a stellar set of numbers I was moved to write:

'For choice with ADM I have put a US$44 flag price on the stock just because this was an historic resistance/support level.  I do note that capital return (dividend plus buyback) is good'

So the shares have gone up and then gone back down since then but still remain above the US$44 interesting level:

So what did the company say?  The CEO's perspective struck me as particularly interesting with a statement that ticked most boxes outside of the South American oilseeds business and inventory build on the ethanol side.

From a valuation perspective the company has become more interesting with a strong final quarter of the year helping push the headline EV/ebit FY14A metric to a little under x8.4.  Even adjusting for the volatility of some of the underlying businesses that is starting to look like a value area.  


Cash flow is a little less clear cut with a big working capital inflow being more than counterbalanced by net acquisition spend and further blurred by a debt increase and a stock buyback.  Still combine the latter with the dividend and shareholder remuneration was nicely over the 5% of market cap level. With net debt nicely less than x1 ebitda despite the inevitable working capital 

But now cheap? Well if you take the company's prepared comments conclusion at face value then the combination of simplification/selling assets and buybacks (7% of market cap potentially) opportunity is building. 

'So a strong finish to 2014, good conditions for the year ahead and continued improvements in our portfolio of businesses. Overall, we feel very good about our position for 2015. To recap a few news items we announced on today's call, we are targeting an additional $550 million in run rate cost savings within the next five years. We have agreed to sell 50% of our port facility in northern Brazil to Glencore, and together we will be quadrupling capacity of the port. We are targeting up to $2 billion of stock buybacks for the calendar year and the Board has increased our quarterly dividend from $0.24 to $0.28' 

On the conference call there was a lot of attention paid to ethanol - way beyond its actual profit relevance today.  Clearly this remains a high profile issue and although conditions are not easy with low energy prices the strategic positioning is unlikely to get worse:

'...these low margins will correct itself, the supply issue, and we expect increasing margins as we go into the later part of Q1'

All agribusinesses have a degree of uncertainty, unpredictability and reaction to events.  The 5%+ fall since the results were announced looks like an overreaction to me.  I think value is building here.  

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