How Does ADM Thrive During Times of Crisis?

What Glencore is to metals and mining Archer Daniel Midlands, ADM, is for food. The trade in food commodities is dominated by four large companies, known as the “ABC” – ADM, Bunge, Cargill, and Louis Dryfus. Only Bunge and ADM are publicly listed.

ADM is part of the Emperor USD Enhanced Portfolio and the share is also available to invest. (short name: ADM).

In summary, we find this business interesting, particularly at this time, as their position at the center of the global food business gives them unmatched insight into the world economy. They have a first-look insight into food inflation, the impact of floods/droughts brought on by climate change, the impact of shipping rates and oil prices as they move their commodities around, the impact of the Russian-Ukraine war on energy and fertilizer prices as well as the impact of the ESG movement due to their involvement with ethanol and biodiesel, to name but a few. While they are gathering and selling commodities around the world and providing governments with their supply/demand insights, they also place large trades, often very profitable, on the future direction of the commodity markets where, by virtue of their business, they have a very keen insight.

 What do they do

They divide their business into four product areas – human nutrition, animal nutrient, industrial biosolutions, and services.

Human and animal nutrition includes beverages, dairy, confectionary, pharmaceuticals, feed additives, and macro ingredients.

Industrial uses include biodiesel and ethanol where vegetable oils are essentially heated and treated with alcohol and then used as a fuel supply, thus reducing the use of fossil fuels. They also supply, amongst other things, emulsifiers, solvents, industrial oil, starches, and fertilizer distributors.

ADM sits in the middle of the food commodity business and as such provides intermediatory services to farmers (such as grain elevators), traders (such as futures execution and clearing), and transportation and logistics (world-class fleet of trucks and ships).

A good fit for the Emperor strategy

Emperor Asset Management analyzes the market by determining what fundamental themes are driving the market and which stocks are showing momentum, value, quality, and stability characteristics within those themes.

ADM is exposed to our “Stuff” theme. We classify companies into this theme that are providing building block commodities or materials for other uses. ADM operates in an industry dominated by four big players, of which it is one (hence a quasi-monopoly) and has a moat in this industry due to its size and extensive operations.

Due to its position in the industrial food chain, it is a price maker, not a price taker, and hence is insulated from inflation.

It is relatively unscathed by the geopolitical turmoil in the markets with issues such as Ukraine and China and if anything, such volatility makes their business more necessary. For example, Ukraine is a breadbasket of the world and with the Russian invasion, companies such as ADM are more necessary now than ever to make sure that there is enough food in the world, and that it gets to where it is needed. Furthermore, their goods are priced in dollars, so they do not feel the currency impacts (foreign currencies have been weakening against the dollar) that other global businesses are facing. For example, companies such as Microsoft, Apple, and Nike have all highlighted recently how their sales outside of the US have impacted their final US dollar returns.

They also have the tailwind of ESG issues as their products are used as alternative fuels thus reducing our reliance on fossil fuels. Although this does have a negative consequence, as food is being used for fuel while there are still hungry people in the world, it’s a delicate balance.

ADM posted, on 25 October, its strongest third-quarter profit on record; this comes on top of a 74% rise in 2nd quarter's profits. ADM thrives during a time of droughts, war, inflation, and other crises. We see this in CEO Juan Luciano’s recent statements on the earnings call: "From what we can see here in a very uncertain world is we have very good momentum going into 2023.” Net earnings were $1.03 billion, or $1.83 per share (estimates were for $1.39 per share), compared with $526 million, or $0.93 per share, a year earlier.

Using Emperor’s factor analysis:

• ADM show earnings, free cash flow and share price momentum.
• ADM ranks highly on our quality score where we look at the endurability and profitability of a company over different market cycles.
• However, the company ranks less well on our stability and value factors. Looking at the graph you can get an idea of the company’s stock price volatility and the company has had a recent run-up, especially compared to the overall market, and the company is no longer a value play.

Conclusion

ADM stands to benefit from a more volatile world where geopolitical tensions and inflation fears reign. While investors may fear that they have missed the boat due to their recent share price performance, we believe that investors with a long-term horizon could find a place in their portfolio for this company that is riding a number of tailwinds.

Sources – EasyResearch

Source and date of performance data: EasyEquities platform 9 March 22 - 29 Nov 22. Past performance is not necessarily an indication of future performance. All performance figures reported are the actual performance of the share taken from the EasyEquities platform.