Stock Thief

You may have never heard of Archer Daniels Midland CO, but chances are that you’ve been using their products for a very long time. The company is a processor of oilseeds, corn, wheat, cocoa, and other agricultural commodities and is a manufacturer of vegetable oil, protein meal, corn sweeteners, flour, biodiesel, ethanol, and other food and feed ingredients.The company also operates a very extense  transportation network of ocean going vessels, railroads, and trucks. The company’s vertical integration gives it  a massive competitive advantage over other agribusiness companies.

This year was an excellent year for Archer Daniels Midland from many perspectives. The company grew operating profit by 38 percent year-over-year versus a 24% advance for the calendar year of 2010. Every business unit of the company experienced strong growth during 2011. The strongest growth came from the corn unit with a whopping growth of 47%, largely due to lower corn prices. The company has also made very strategic investments totaling 1.5 billion with an average return on equity of 12.3 percent. Their investment portfolio includes the recent acquisition of The Golden Peanut Co, a respectable peanut shelling company. The company also recorded it safest year ever by reducing recordable incident rate by 17 percent and decreasing lost workday injury rate by 7 percent. The company remains committed to expanding its operations and improving safety.

While the current dividend yield of 2.4% may seem a little lackluster, the company is committed to creating value for shareholders. The board of directors has authorized the repurchase of 1 billion common shares and 500,000 preferred shares. This represent roughly 5% of the company’s market capitalization. ADM also has also extended their dividend record to 319 consecutive quarters, or nearly 80 years.

From a valuation standpoint, ADM is darn CHEEP! The company currently sells for a P/E ratio of 9, a price to cash flow ratio of just 6. Additionally the company sells just slightly above book value. The company’s market cap is around 20 billion, but I value the company at 45 billion given their strong history of commitment to customers and shareholders. This makes the company a steal for a stock thief like myself. I plan to increase my position in this company soon.

Beyond the valuation metrics, I really believe in the business model and leadership of ADM. I also see the benefit of owning this company to diversify my portfolio to capture the power of secular long term growth trends. It’s a simple reality, as the population of the world grows and expands, a rising demand for food will translate to greater volumes and increased revenues. The company is in excellent financial strength. Furthermore, ADM has less exposure to inclement weather conditions compared with food growers. If you’re not already convinced, just look at their balance sheet. Where can you find a consumer staples company with reliable, consistent, long term equity growth like this?

 

Disclosure: I am long ADM