ADM: Gauge Analysis (updated February 18, 2021)

I have analyzed Archer-Daniels-Midland's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis uses gauges to assess how well the company satisfies seven specific investment criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied.  An Overall Score between zero and 100, which takes all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms.  An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.

First, a quick review of the company itself.

Archer Daniels Midland is a global agribusiness, based in Chicago, that purchases, transports, stores, processes, and merchandises agricultural commodities (including oilseeds, corn, and wheat) and products (such as vegetable oils, flour, other food ingredients, livestock feed, and biofuels).  ADM, which views itself as one of the world’s "leading nutrition companies," invested $1.8 billion in 2019 to acquire Neovia for its global animal feed business.  ADM is trying to sell its mills that produce the biofuel ethanol because this product has become less profitable.

ADM recorded profits of $2 billion on revenue of $64 billion during the last year. In the quarter that ended on December 31, 2020, ADM earned $1.21 per share (excluding certain items), which significantly beat the $0.71 Wall Street consensus forecast. See ADM's most recent quarterly report.

Shares of ADM now trade for about $56 each, giving the company a market value of $31 billion. These shares can be found in the Standard and Poors 500, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 stock indices.

Analysis Results:

ADM's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $31.4 billion (large cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 1.5 (>2.0 is conservative)

    Long-term debt/Working Capital = 87% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

    Twenty positive quarterly earnings reports in last 5 years (perfect)

    Earnings variability = 11% (modest)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 57% (terrific)

    Owner Earnings growth rate (five-year average) = 21% (very good)

    Free Cash Flow growth rate (trailing year) = 0% (poor)

    Free Cash Flow growth rate (five-year average) = 18% (good)

5. The Company is Efficiently Profitable: RED

    Cash Flow Return On Invested Capital = 8% (so-so)

    Operating Profit/Sales = 2.7% (meager)

6. The Company Pays a Healthy Dividend: YELLOW

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 4.6% (weak)

    Dividend = 58% of last year's FCF (sustainability is a concern)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 14.7 (appealing)

    Price/GAAP Earnings (five-year average) = 20.3 (moderate to pricey)

    Free Cash Flow/Market Value = 4.4% (modest, less than the five-year average of 6.4%)

    Acquirer's Multiple = 19.8 (expensive)

    Price/Book Value = 1.6 (more expensive than the five-year average of 1.3)

    Price/Sales = 0.5 (about the same as its five-year average)

In summary, the analysis assigned Archer-Daniels-Midland three GREEN, two YELLOW, and two RED grades.  The resulting Overall Score is 41 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, ADM does not satisfy the GCFR criteria for investment consideration at this time.

The share price would theoretically have to fall by 40.9 percent, from $55.82 to $32.98, all else being equal, to lift the Overall Score to the 60-point threshold. It is also possible that ADM's future results will push the score up (or pull it down).  Revisit GCFR2 occasionally for updates on ADM's performance and the latest GCFR gauges and scores.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #adm  #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

ADM: Earnings Report for the Quarter Ending December 31, 2020

Archer-Daniels-Midland reported before the market opened on January 26, 2021 it earned $1.22 per diluted share in the quarter that ended on December 31, 2020, up 36 percent from earnings of $0.90 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Adjusted earnings, a non-GAAP figure, fell 15 percent to $1.21 per share from $1.42 one year earlier, a much worse change than the GAAP percentage. The exclusions responsible for the $0.01 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Impairment, restructuring, and settlement charges [$0.03 per share], Tax adjustments [($0.04) per share], and Acquisition and divestment  [$0.00 per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by ADM to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by ADM's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  Chicago-based ADM is a global agribusiness that purchases, transports, stores, processes, and merchandises agricultural commodities (including oilseeds, corn, and wheat) and products (such as vegetable oils, flour, other food ingredients, livestock feed, and biofuels).  In the first quarter of 2019, ADM acquired Neovia and Florida Chemical Company as it seeks to become one of the world’s "leading nutrition companies."  Separately, ADM is creating an independent ethanol subsidiary that it may eventually sell or spin-off.

The following table is a simplified version of ADM's Income Statement for the December 2020 quarter, with company-reported along side my predictions.  Data from the year-earlier quarter are also provided.

Revenue in the December 2020 quarter totaled $18.0 billion, 10 percent more than last year's $16.3 billion. The Agricultural Services and Oilseeds business was responsible for 80 percent of overall revenue, and this unit's revenue grew by 16.3 percent compared to the year-earlier result. The Carbohydrate Solutions business contributed 12 percent of revenue, and this unit's revenue decreased by 16.1 percent. The Nutrition unit supplied 8 percent of revenue, and this business's revenue rose by 1.9 percent.

I was expecting ADM to report revenue of $16.3 billion for the December 2020 quarter.  The actual amount surpassed my estimate by $1.6 billion (10.0 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $16.6 billion in the latest quarter, which translates into a Gross Margin of 7.5 percent of revenue. Since it was higher than the 7.2 percent Gross Margin achieved in the year-earlier quarter, it signifies that ADM sold its products and services at more profitable prices relative to production costs. I was expecting the Gross Margin to be 6.7 percent in the December 2020 quarter, and ADM exceeded that prediction by 0.8 percent.

Sales, General, and Administrative expenses totaled $749 million in the December 2020 quarter, up from $654 million one year ago.  SG&A expenses increased from 4.0 percent to 4.2 percent of quarterly revenue, which shows ADM spent more per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 4.2 percent of revenue, and ADM spent less than that percentage.

The last operating expense line on the Income Statement is for other operating income and expenses, such as restructuring.  This line amounted to a $19 million loss in the latest quarter.  I was expecting a net loss of $22 million.

ADM's Operating Income was $584 million in the quarter, up 41.7 percent from the year-earlier period.  Operating Income exceeded my $388 million estimate by $196 million.

Interest and other non-operating items summed to a net expense of $4 million.  My estimate was $72.0 million.

The effective income tax rate rose by 11.5 percent to 10.9 percent, which had a negative effect on net income.  I expected the tax rate to be 10.0 percent.

Net income in the quarter attributable to ADM was $687 million, $1.22 per share.  The figures for the year-earlier quarter were $504 million, $0.90/share. My earnings estimate for ADM in this quarter was $413 million ($0.73/share).

In summary, Archer-Daniels-Midland earned in the December 2020 quarter much more than I had expected. The company had better than predicted: Revenue growth, Gross Margin, Operating Income growth.  The company did worse with: Income tax rate.

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

 #adm        #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

ADM: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Archer Daniels Midland's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available on February 2, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about ADM.

Chicago-based ADM is a global agribusiness that purchases, transports, stores, processes, and merchandises agricultural commodities (including oilseeds, corn, and wheat) and products (such as vegetable oils, flour, other food ingredients, livestock feed, and biofuels).  In the first quarter of 2019, ADM acquired Neovia and Florida Chemical Company as it seeks to become one of the world’s "leading nutrition companies."  Separately, ADM is creating an independent ethanol subsidiary that it may eventually sell or spin-off.

Shares of ADM now trade for about $51 each.  These shares can be found in the Standard and Poors 500, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 stock indices.

ADM recorded profits of $2 billion on revenue of $63 billion during the last year. In the quarter that ended on 30 September 2020, ADM earned $0.89 per share (excluding certain items), which significantly beat the $0.71 Wall Street consensus forecast. See https://tinyurl.com/y5v988oj for ADM's most recent quarterly report.

Revenue in the September 2020 quarter totaled $15.1 billion, 10% less than last year's $16.7 billion. The Agricultural Services and Oilseeds business was responsible for 76% of overall revenue, and this unit's revenue fell by 8.6% compared to the year-earlier result. The Carbohydrate Solutions business contributed 14% of revenue, and this unit's revenue fell by 19.5%. The Nutrition unit supplied 10% of revenue, and the amount was essentially unchanged from the year-earlier period.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

ADM management communicated some expectations for the December 2020 quarter during the conference call with financial analysts after the company announced its third-quarter results last October.  A few relevant excerpts follow:

Looking ahead, we expect to see strong North American exports and global crush margins in the fourth quarter, combined to contribute to a very strong Ag Services and Oilseeds performance, with results significantly higher than the third quarter of this year, though lower than Q4 of 2019, which included a $270 million benefit for 2 years of the retroactive biodiesel tax credit.

Looking ahead, we expect the fourth quarter for Carbohydrate Solutions to be close to Q3 of this year and substantially higher than the fourth quarter of 2019, driven by improved year-over-year fuel ethanol margins and higher industrial-grade sales. While Sweetener and Flour volumes will still be impacted by weaker food service demand, we expect the year-over-year percentage decline to be smaller than it was in Q3.

Looking ahead to the fourth quarter, we expect nutrition to deliver another quarter of 20-plus percent year-over-year OP growth with a typically seasonally weaker Q4 in Human Nutrition, offset by seasonally stronger Animal Nutrition

The guidance above, if I'm interpreting it correctly, suggests that ADM's Segment Operating Profits for the fourth quarter may be in the ranges listed below.

Corporate results that subtract from Segment Operating Profit averaged $400 million per quarter during the first nine months of 2020.  If the fourth quarter turns out to be similar, Income before Taxes could be $380 to $540 million.

It's not the ideal analytical approach but, lacking other definitive information, I played around with the Income Statement to get Income before Taxes to equal $460 million (midpoint of the range above), while keeping each line more or less consistent with the company's historical results.  The result was an estimate for earnings of $413 million ($0.73 per share).

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #adm  #archerdanielsmidland  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

Archer-Daniels-Midland: Gauge Analysis (updated November 16, 2020)

I have analyzed ADM's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis evaluates investment suitability by gauging how well the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the calculation is weighted to favor companies that exhibit good value characteristics over firms that are fast growers but expensive.

An Overall Score of 60 or higher is a good result, and it signifies that the company has enough value-investment appeal to be worth examining in more detail. 

First, a quick review of the company itself.

Chicago-based ADM is a global agribusiness that purchases, transports, stores, processes, and merchandises agricultural commodities (including oilseeds, corn, and wheat) and products (such as vegetable oils, flour, other food ingredients, livestock feed, and biofuels).  In the first quarter of 2019, ADM acquired Neovia and Florida Chemical Company as it seeks to become one of the world’s "leading nutrition companies."  Separately, ADM is creating an independent ethanol subsidiary that it may eventually sell or spin-off.

ADM recorded profits of $2 billion on revenue of $63 billion during the last year. In the quarter that ended on 30 September 2020, ADM earned $0.89 per share (excluding certain items), which significantly beat the $0.71 Wall Street consensus forecast. See https://tinyurl.com/y5v988oj for ADM's most recent quarterly report.

Shares of ADM now trade for about $50 each.  These shares can be found in the Standard and Poors 500, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 stock indices.

Analysis Results:

ADM's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $28.3 billion (large cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 1.6 (>2.0 is conservative)

    Long-term debt/Working Capital = 89% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

    Twenty positive quarterly earnings reports in last 5 years (perfect)

    Earnings variability = 17% (moderate)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 27% (very good)

    Owner Earnings growth rate (five-year average) = 12% (good)

    Free Cash Flow growth rate (trailing year) = -5% (poor)

    Free Cash Flow growth rate (five-year average) = 27% (very good)

5. The Company is Efficiently Profitable: RED

    Cash Flow Return On Invested Capital = 12% (decent)

    Operating Profit/Sales = 2.7% (meager)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 4.9% (weak)

    Dividend = 33% of last year's FCF (easily sustainable with room to grow)

7. The Company's Shares are Fairly Valued: YELLOW

    Price/Owner Earnings (last year) = 14.7 (appealing)

    Price/GAAP Earnings (five-year average) = 18.4 (moderate to pricey)

    Free Cash Flow/Market Value = 8.5% (appealing, more than the five-year average of 6.2%)

    Acquirer's Multiple = 18.0 (expensive)

    Price/Book Value = 1.5 (about the same as its five-year average)

    Price/Sales = 0.5 (about the same as its five-year average)

In summary, the analysis assigned Archer-Daniels-Midland four GREEN, two YELLOW, and one RED grades.  The resulting Overall Score is 54 of the 100 possible points, which is not high enough.  The score is below the 60-point threshold, and, therefore, ADM does not qualify at this time for consideration.

Check back here occasionally for updates to the Overall Score, which can change when the company releases new financial results and when there's a significant change in the company's share price.

This analysis reported here is not, by any means, a complete evaluation of the subject company, and it does not consider all material facts about the company's operations, finances, or future prospects. The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate. Readers are encouraged to independently verify all data. Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  The analysis is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The methodology and results are subject to change without notification.

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 #adm        #gauges  #gcfr  #gcfr2 #valueinvesting   #financialanalysis