NYSE:ADM Archer-Daniels-Midland

Sector financial performance:

This company, who provides oilseed related service and processing, has been grouped in agribusiness and oilseeds processing sector of food industry.

Factors that influence demands for commodity and products that companies purchase and process mainly include demographic development and demands for meet protein/animal feeding.  Our data indicates that the global demands for agricultural commodity and processed oil and animal feeding protein seem to be rebounding in 2018 after continuing decline of several years, which can be partially attributed to declining demands for meet protein from pork and chicken.

Stronger demand seems to be supported by 2-3% annual growth in sales volume in 2017/18 from some of typical companies in this sector as compared with the average sales volume’s decline (at about 2% annual rate) in 2015/16. It seems the profits and cash inflows of the companies in this sector have been determined to larger extent by the margins since cash flow is obviously more sensitive to changes in margins when margins are relatively at low level.

As we know, in the agribusiness the margins are directly related to changes in commodity price, which are usually volatile in a large range. While the changes in commodity prices can be passed on to the prices of final products, due to time delays or use of future contracts, companies’ operating margins and thus operating incomes fluctuated during the time when commodity price are volatile as a result of changes in supply and demand. The average operating income in this sector decreased by 20-50% annually in 2016/17 when the commodity price went up but sales did not yet. However, as sales caught up and the rise of price slowed down in 2018 we have seen a large improvement in operating income of those companies (an average 120% annual growth).

Therefore, the companies’ fluctuated financial performances for some certain years have been determined to large extent by the volatile commodity prices and in the long run it generally has nothing to do with how the companies use derivatives to mitigate the impacts from trading market. It may be helpful in planning your budgets but not in improving income. Therefore, since we are not able to predict the changes in commodity prices, which are related to the whole agricultural environment and get involved with many uncertain factors we are not going to predict the agribusiness companies’ financial performances including operating income or cash inflow. Focus should be given beyond cycle of commodity prices fluctuation.

According our data, the sector‘s average enterprise price/EBI ratio has been fluctuated (relatively stable price of stock), a signal that capital market filtered the part of impact to the stock price from commodity market. We think a multiple of 20-26 may be appropriate to reflect the stability of cash flow generation and security of assets among companies in this sector.

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Company performance:

It seems the demand for this company’s agriculture commodity and processed oil products, after be weak for several years, finally caught up in 2018 as indicated by increased sales volume and price.

For the first nine months of fiscal 2018 compared with the same period of 2017

Sales of this company’s agribusiness products, mainly commodity and processed products from corn and oil seeds, increased by 8% due to increase of 4% in sales volume of unprocessed commodity and oil and increase of about 4% in price.

For fiscal 2017 compared with 2016

Sales of this company’s agribusiness products, mainly commodity and processed products from corn and oil seeds, decreased by 2% due to decrease of 2% in sales volume of unprocessed commodity. Price was flat.

It seems the global demands for this company’s agribusiness products have been consistent as indicated by its sales volumes (down by 3.5% in 2016 and flat in 2015).  However, mainly due to deceasing commodity prices, its sales numbers went down by 8% and 17% in 2016 and 2015 respectively.

While companies in this sector usually generated higher gross margins facing plunging commodity price and lower gross margin when price goes up, this company offered constant gross margins ( changes in gross margins is in +/- 1%) even during the period when commodity prices were volatile between 2015 and 2017. This, we think, may mean an efficient management in this company’s budgeting and forecasting. 

While unchanged gross margins, increased SG&A spending harmed its operating margin considering that its gross margins are already at low level. With declining sales, its operating income went down by about 8%, 20% and 30% in 2017, 2016 and 2015 respectively.

However, the improved demand and thus the increase in sales and margin help generate a 30% increase in its operating income in 2018.

This company’s low margins present a typical performance as a company in agribusiness sector: its current gross margin, operating margin, and cash inflow margin are about 6.3%, 3%, and 1.6%.

Stock price                                            

Our valuation methods and analysis indicate it might be currently fairly valued by the market with an enterprise price/EBI of 21 and enterprise price/sales of 0.5.

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