We reiterate our long-term Neutral recommendation on Archer Daniels Midland Company (ADM). Archer Daniels is one of the leading players in the global food processing industry and commands a massive network of more than 560 processing and sourcing facilities and 27,000 vehicles operating across the Americas, Europe and Asia for transportation of agricultural commodities.
This provides a strong competitive advantage to the company and strengthens its well-established position in the market.
Also, Archer appears to be well positioned with its huge storage of milling wheat and an annual ethanol production capacity of 1.8 billion gallons. Management remains focused on a brisk expansion strategy, which bodes well for future operating performance.
Moreover, the world is facing a tight supply of milling-quality wheat due to continued reductions in the production of Australian wheat crop and depletion in supply from Europe. The U.S. is consequently becoming the best source for milling quality wheat, with a rising demand from diverse buyers in North Africa and Middle East. Archer having a substantial quantity of milling wheat in its storage is bound to benefit from this supply-demand dynamics.
Further, the Environmental Protection Agency of the U.S. has increased ethanol blending to up to 15% in 2001-2006 vehicles. Further, the U.S. federal government has extended its $0.45 per gallon tax credit for ethanol producers by one year. With 1.8 billion gallons of annual production capacity, Archer is well positioned to avail this tax benefit, counted in disguise as a subsidy for corn farmers and ethanol producers.
On the flip side, Archer Daniels’ operating performance is based on the availability and price of agricultural commodities, which, in turn, is dependent on factors such as weather, plantings, government programs and policies, changes in global demand and standards of living. As a result, the company is prone to significant risks from adverse fluctuations in any of these factors.
Additionally, agricultural commodity-based business is capital intensive and hence requires sufficient liquidity and financial flexibility to fund the operating and capital requirements. For this, Archer relies on cash generated from its operations and external financing. Limitations on access to external financing could negatively affect the company’s operating results.
The company faces intense competition from its rivals such as privately held Cargill Inc., Bunge Ltd. (BG) and Corn Products International Inc. (CPO). Furthermore, Archer Daniels also encounters competition from local and regional players in the respective countries of operation. Consequently, the company is under severe stress to maintain profitability.
Archer Daniels Midland Co. is one of the leading food processing companies in the world. Archer Daniels also has a worldwide grain elevator and transportation network for procurement, storage, cleansing and transportation of agricultural commodities.
Archer Daniel holds a Zacks #3 Rank, which translates into a short-term Hold recommendation.
ARCHER DANIELS (ADM): Free Stock Analysis Report
BUNGE LTD (BG): Free Stock Analysis Report
CORN PROD INTL (CPO): Free Stock Analysis Report
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