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Archer-Daniels-Midland Company (NYSE:ADM) investors head into a jittery end to February, awaiting the outcome of the recent investigation into ADM’s intersegment sales attributed to ADM’s Nutrition business. For investors new to ADM’s thesis, the company is a leading food and agricultural processing company. As a result, it has tremendous global insights into the agricultural supply chain. However, it operates in a highly cyclical commodities business, as reflected in its relatively low adjusted net margins (estimated 4% for FY23). The company is focused on diversifying from its crop trading business as it looks toward its Nutrition business for margin accretion. However, with the aforementioned segment coming under increased scrutiny, the market is expected to remain tentative on the business in the near term.
Keen investors should recall that the debacle saw ADM’s CFO being put on administrative leave, underscoring the criticality of the outcome. The market also de-rated ADM when the investigation was announced last month, as ADM fell toward lows last seen in February 2021, nearly completing a three-year round trip. As a result, I assessed investors are likely considering whether the steep decline should be capitalized on before ADM releases its updated findings.
ADM CEO Juan Luciano attempted to alleviate investors’ concerns and stabilize buying sentiments. Luciano highlighted the probe is not expected to “materially affect” ADM’s FY23 financial performance. As a result, I gleaned that the selling intensity on ADM has also subsided, as investors likely gave management the benefit of the doubt toward the probe’s initial findings.
Despite that, investors should know that ADM has withdrawn its guidance for the company’s Nutrition business, given the recent challenges. In addition, ADM has also lowered its adjusted EPS outlook for FY23 to above $6.90 from its previous forecast of above $7 per share. It’s also markedly below analysts’ estimates of $7.27, possibly explaining why the market has de-rated ADM.
Notwithstanding the recent challenges, ADM also lifted its dividend per share to $0.50. It marks an 11% increase, demonstrating the company’s stable cash flows as it seeks to bolster confidence for income investors. Seeking Alpha Quant assigns ADM a “B+” dividend safety grade, suggesting no imminent risks to its payout. I also assessed that ADM’s FY24 projected dividend payout ratio of 32% proffers a substantial buffer against an unanticipated downgrade. However, ADM’s relatively unattractive dividend yield of 3.4% might not be sufficient to assure income investors looking for yield. As a result, investors looking to buy ADM’s dip will likely be value investors who consider the battering as overstated.
ADM’s relative valuation levels support the observation. Accordingly, Seeking Alpha Quant assigns ADM an “A-” valuation grade relative to its consumer staples (XLP) peers. Its normalized EBITDA multiple of 7.2x is also well below its 10Y average of 9.5x, suggesting significant valuation compression has occurred.
However, S&P Global Ratings “placed ADM on CreditWatch with negative implications.” It cautioned that while Nutrition is still a relatively small segment (14.5% of ADM’s trailing twelve months revenue base), the probe could “uncover findings relevant to ADM’s broader decision-making procedures and regulatory compliance efforts.” As a result, I believe market sentiments would likely remain highly uncertain as we potentially head into its upcoming findings. In other words, investors must be prepared for higher downside volatility if they decide to capitalize on the selloff to add exposure.
Takeaway
While ADM operates a relatively low-margin business, its solid profitable track record has also garnered an attractive “B” profitability grade from Seeking Alpha Quant. Its robust dividend safety grade corroborates that ADM remains a fundamentally strong company. While the recent probe has justifiably disappointed investors, I assessed that significant pessimism is likely reflected. However, near-term downside volatility must still be contemplated, given the uncertainties. Therefore, investors should consider buying in stages and potentially look to average down if presented with more attractive dip-buying opportunities.
Rating: Initiate Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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Archer-Daniels-Midland: Fundamentally Strong Company Faces The Moment Of Truth
