To The Moon

$Archer-Daniels Midland(ADM)$

Good day, fellow Tiger. Archer Daniels Midland (ADM) is a stock we've discussed several times over the past year. With the release of new earnings, the stock has dropped 10% in the last week. Some of you are calling it a disaster, while others are questioning the shift in fundamentals and the uncertainty surrounding the company. So, what's my stance on ADM now?

The more a stock I cover or own declines, the more I tend to like it. That's why in this video, I want to offer you a comprehensive overview of my investment philosophy, using this stock analysis as a case study. I'll show you how ADM fits into a portfolio and share why I hope it drops another 30-40%.

in this article, we'll focus specifically on Archer Daniels Midland to demonstrate how I approach in-depth stock analysis, helping you understand exactly what you're buying and owning.

Let's begin with the ADM stock analysis. First, let's review the stock price. The key to understanding ADM lies in the food cycle. While the stock has shown long-term growth, food commodity cycles cause the market to swing between periods of exuberance and pessimism. With food-related businesses, we know the market tends to overreact in both directions.

One of the drivers behind ADM's growth is long-term inflation, which impacts food prices, as well as compound growth from population increases. This trend is clearly visible in the stock price, and the key is to position yourself correctly within that cycle.

ADM's market capitalization is currently $22 billion, and while the P/E ratio may not be helpful for cyclicals like ADM, the stock offers a dividend yield of 4.48%.

Let’s begin with an overview of the business. So, what exactly is ADM? The company is a food processing business—they source, store, process, and distribute food globally. With over 700 facilities around the world, ADM operates across four key segments: Agricultural Services, Processing, Specialties, and Carbohydrates, the latter being a more stable segment. For more details, you can check out their investor presentation. Additionally, ADM owns 22% of Wilmar International, which is the Asian counterpart to ADM and is another stock covered on my other article.

When it comes to ADM's profits, they are highly dependent on food prices. Higher food prices boost margins for storage, processing, and distribution, while lower food prices in a downturn can have the opposite effect. You can see this reflected in the company's profits—relatively high during a boom, dipping in downturns, and stabilizing before booming again in 2022 and 2023, when food prices surged. Currently, we are entering another food downturn cycle.

Geographically, ADM's agricultural services and oilseeds are most prominent in the Americas, with some presence in Europe and Asia. The carbohydrates segment is a more stable part of the business, primarily based in North America, Europe, and China. This segment includes stable profit lines like starches and sweeteners.

Now, let’s talk about one of the more controversial aspects of ADM: their nutrition segment. Over the past decade, they made significant acquisitions to increase exposure to higher-margin businesses. However, this strategy didn’t work out initially, as there were accounting issues, which hopefully have now been resolved. Profits from this segment have yet to meet expectations, but improvements may come over time. ADM is also expanding into animal nutrition, with a $1.9 billion acquisition of Neia in 2019. While accounting issues did lead to stock market shocks, they’ve typically been related to only 10% of the company during each incident. While this presents a risk, it’s essential to view the company from a long-term perspective.

Another issue to keep in mind is the explosion at ADM's Decatur plant, a nutrition facility that is expected to come back online this year, which should boost profits. ADM is always on the lookout for acquisitions to integrate into their broader ecosystem, bringing in smaller businesses and leveraging their global footprint.

In terms of the sector, food has a strong structural tailwind. This is crucial for investors because, when you invest in a sector with a positive long-term trend, even if you make a mistake, the broader upward momentum helps mitigate those errors. That’s always a positive factor to consider.

That’s why I prefer investing in businesses where I’m confident about a positive future outlook. Take global food consumption, for example—it's steadily increasing. As the world population grows and global incomes rise, food consumption is likely to keep expanding. This is reflected in the food price index, which shows a cycle of negative and booming price trends. We've seen prices fluctuate—down, up, down, up—but now we’re seeing higher highs and higher lows, indicating a stabilizing trend. This is the food cycle in action.

With inflation and likely continued money printing by governments over the coming decades to address debt issues, it's highly probable that real assets will benefit from inflation. This adds to the long-term positive structural trend for businesses in this sector. As we look at these cycles, profits may dip, rise, and dip again, but the long-term trend shows profits growing. Over the past 20 years, ADM's profits have grown from half a billion to $3 billion on average. For 2024, while profits and cash flows are down across all segments, the company still reported solid cash flows of $3.3 billion from operations. They've lowered their earnings guidance, but they are increasing the dividend and maintaining their buyback program—though share buybacks are unlikely unless there's extra cash flow. They are continuing to invest heavily in organic growth and development, so there’s nothing concerning about the business at this stage.

However, we need to talk about the balance sheet. For companies with long-term assets like ADM, there is $7 billion of Goodwill—though we won’t focus on that. The real point of interest is the property, plant, and equipment (PPE). The accumulated depreciation is $18 billion, and the net PPE is only $11 billion. These figures reflect historical costs, and building such facilities today would likely cost two to three times more than ADM originally paid. This provides a margin of safety, as it’s unlikely anyone would replicate these assets nearby due to the high cost of building similar infrastructure. This kind of barrier gives ADM a competitive edge.

The result of being a business with such a moat in a positive structural trend is reflected in ADM’s remarkable 50 consecutive years of dividend increases. It's highly probable that they will continue increasing dividends over time, making it an attractive long-term investment.

When ADM has extra cash flow, they typically use it for stock repurchases. This is often combined with higher stock prices, which can be a bit of a negative, but it's something we need to factor in when considering an investment in ADM. The strategy here is to sell shares to the company during buybacks and then repurchase them during a downturn—that could be the most effective approach.

There are liabilities to consider, but remember that ADM is a trading company. When you're buying equity, you're essentially investing at book value. Regarding cash flow, when commodity prices rise, they need to increase working capital to buy, store, and eventually sell those commodities. When prices fall, they can release that capital, which increases cash flow for the business. So, even if profits dip, the company can survive downturns for a few years by managing its working capital.

The share repurchase program is still in place, and it would be great if they decide to execute it now. You can see how changes in inventories, when prices fall, positively impact cash flow by around $3 billion. Looking at the price cycles, you can see that during downturns, they generated around $2 billion in profits—starting from just half a billion. By the 2010s, their lows were around $1.5 billion, much higher than the previous half-billion mark. As prices increase, profits also rise, with 2022-2023 reaching approximately $4 billion. Now, they’re expected to generate lower profits—perhaps $1.7 billion, or even $1.3 billion next year.

The market is often short-sighted. As some of you mentioned, there are concerns about fundamentals, but it’s important to remember that these cycles are just part of the business. The market tends to overreact during downturns, and this presents an opportunity for value investors. The stock recently fell from around $100 to $50, reminiscent of its dip during the COVID crisis. What I always do is check the latest conference calls to get an idea of the company’s outlook.

As they’ve already indicated, 2025 isn’t expected to be stellar, which is something we anticipated. This provides an opportunity to buy at lower prices, but the market tends to react strongly to such confirmations. This analysis reflects the prior call, and we’ll discuss the new one soon.

Regarding the accounting scandals, those are risks, but they appear more related to stock price perception than real concerns. There was a major drop during the accounting panic, compounded by declining food prices. That’s the nature of the business. Although ADM has acknowledged and addressed these accounting issues, they still face risks like droughts, outages, and fires. These events will happen again, but the company continues to invest in ventures, such as their $5 billion joint ventures, which represent a quarter of the market cap.

Earning Overview

Regarding the latest Q4 earnings update, the results are a bit lower than 2023, but still positive. The carbohydrates segment remains stable, and nutrition is showing improvement. Despite lower earnings, there are still solid cash flows—$3 billion before working capital changes. The company’s guidance is uncertain, but as investors, we need to factor in potential market reactions and look for buying opportunities in the next couple of years. The company has cautioned that 2025 profits might only be around $1 billion. If that happens, the stock could drop another 30-40%, as the market often reacts dramatically to short-term news.

As for the outlook, earnings are projected to be between $4 and $4.75 billion, possibly even as low as $3 billion. We need to keep this in mind when making investment decisions. ADM is also focusing on cost-saving measures and laying off staff, which is typical in a downturn. They’ve also mentioned potential buybacks but aren’t planning anything for the moment. Global supply factors and tariffs could impact ADM, but as always, there’s a cost to these things, especially when retaliatory tariffs come into play. Economics rarely offers a free lunch, so we’ll see how this evolves.

Valuation

To sum up, when it comes to valuation, ADM has been increasing dividends for 50 consecutive years and has paid them for 93 years—a remarkable and rare achievement. Now, let’s take a look at an analysis using my premium research platform template. You’ll notice a difference between this template and the one from my free stock market investing course, which focuses on explaining market pricing and potential evolution. In this template, I’m offering my personal view on the absolute possible returns from investing in ADM.

Let’s break this down. Assuming the downturn lasts another five years, we’ll project a 2% growth rate for the dividend during this period, followed by a 6% growth rate during the next food upcycle. For comparison, I’ll use a 10% discount rate and a 10% return with a terminal multiple of 20 on the dividend, which gives a 5% yield. Based on this, the intrinsic value of ADM would be $36—this would represent an average intrinsic value.

Now, let’s consider a best-case scenario. If the food cycle turns around next year and the dividend increases by 6%, while the market shifts to demand a 4% yield, we’ll see that the present value is already higher than that. On the flip side, in a worst-case scenario where dividends grow by just 2% over 10 years, and the market expects a 6-7% dividend yield, the present value drops to $20.7, providing a significant margin of safety.

This analysis applies to a different portfolio on my research platform. We can’t know the exact probabilities, but from an absolute perspective, we’re looking at potential returns of around 78% from this company.

Now, let’s dive into the market cap and earnings potential. ADM’s market cap is currently $21 billion, but in the next 10 years, earnings could range from $1 billion to $5 billion. If they hit $4-5 billion in earnings, the price-to-earnings (P/E) ratio could likely be around 15 with positive results. This would give us a market cap of around $60 billion—essentially a 3x increase, plus a potential 4.8% dividend yield. If this happens in 5 years, we’re looking at 20% returns; in 10 years, it’s still an impressive 10-12% return. This reinforces why I consider the stock a buy now, with potential repurchases if cash flows increase.

When it comes to portfolio allocation, I have a diversified research platform portfolio and my personal portfolio. The model portfolio has included ADM since 2017-2018. We’ve made two purchases so far, with the position now accounting for less than 1% of the portfolio. In the diversified portfolio, ADM is almost at full position, but I’m holding off on additional buys until it drops below the $40 mark. If it does, I’ll add more to the diversified portfolio, increase my position in the model portfolio, and consider it for my personal opportunistic portfolio.

As the stock price has dropped, I’ve increased my long-term return outlook for ADM, which I believe will likely be around 10%, possibly even higher, over the next decade. With dividends growing and a positive long-term food cycle trend, I consider this a strong buy.

Conclusion

So, how does it fit in your portfolio over the next 10 years? With growing dividends, a positive food cycle, and long-term trends, it could be a great addition. I’m hoping the stock falls below $40 to add more. If it reaches $30, I’ll be smiling, but even at $45, it might still fit well into a diversified portfolio due to its cyclical nature. The market outlook for ADM is currently for $1.5 billion in profits, but if the food cycle strengthens, we could see up to $4 billion in profits and a $60 billion market cap, which translates to a 24% annual return by 2030.

The key is that you’ll receive the dividend while waiting for that cycle to turn, and if the company buys back shares, your returns could improve further. Meanwhile, reinvesting the dividend at lower prices will compound your portfolio over time.

I’ve deeply analyzed using the same approach. I focus on identifying businesses with the highest certainty for long-term growth—no matter what happens in the short term. I wait for the right prices to invest and aim to compound my portfolio with businesses that pay dividends and offer growth. That’s my strategy, and that’s value investing. Follow for more!

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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