As the food industry has recently posted 52 week highs, many investors may wonder if there are any companies relative to this type of service which offers a good opportunity to accrue capital gains. After examining each company relative to this industry, I have found one company, Archer-Daniels-Midland Company (ADM) to be supportive of the proper fundamentals when juxtaposed to its rivals. Thus, coupled with a good economic situation, Archer-Daniels, at its cheap price, absolutely has the figures to help investors make an intelligent investment.
Looking at what exactly Archer-Daniels does, according to Yahoo! Finance, this company engages in the procurement, transportation, storing, processing, and merchandising of agricultural commodities. When looking at this statement, some investors may be wary that commodities as of late have not sustained the growth found in previous years. While such a statement is true to an extent, such evidence tends to be more favored for commodities relative to the energy sector (i.e. crude oil). In terms of commodities more prominent to the business Archer-Daniels engages in, commodities such as soybeans, corn, and even livestock and pork bellies, have all done fairly well in the past few months, signaling strong demand for these products from both producers and consumers. Especially in the case of corn, since ethanol production still remains a top energy substitute in the future, the Corn Processing segment of this company will also tremendously benefit from the rising prices. To make matters even more lucrative, because such commodities are typically inelastic goods, when the price of such commodities rise during times of inflationary periods, consumers and producers will continue to purchase the goods in similar quantities, regardless the price, adding extra revenue service to companies like Archer-Daniels. In addition, because the prices still tend to remain relatively high as inflationary pressures continue to urge Federal Reserve members to be hawkish on such monetary expansion, commodity prices should continue to remain high allowing for higher profits and more enticing services adding to the interest in purchasing shares for this company.
Adding to the favorable and necessary high commodity prices, Archer-Daniels still has the strong fundamentals relative to both the share price and industry to add to the idea of being a strong buy. After a small slowdown in revenue growth from 2004 to 2005, revenue picked up once again during the most recent fiscal year and has provided more optimism for investors of this company. Nevertheless, even with increased revenue growth and earnings which have more than doubled from 2004 to 2005 and grew 33% from 2005 to 2006, the share price is still below industry standards. Compared to rivals Heinz, Kraft Foods, and Unilever which are all trading at their respective 52 week highs, Archer-Daniels still remains relatively cheap, as it currently trades closer to its 52 week low rather than high. While some investors may place the blame on poor fundamentals, when comparing the relative multiples of Archer-Daniels to its rivals, it is clear that this company is undervalued. Archer-Daniels currently supports a P/E ratio near 13 with a forward multiple of around 11. As the industry average multiple is near 15, there is clear indication that Archer-Daniels is undervalued with respect to arguably the most important multiple valuation. While other investors may look at a company like Unilever which supports a trailing P/E ratio of an incredible amount of around 4, the forward multiple is not as favorable with a ratio closer to 15. When examining some other more broader multiples, it seems that Archer-Daniels continues to support its undervalued theory as its PEG, enterprise value to revenue, and enterprise value to EBITDA of 1.24 (5 year growth), 0.65, and 8.02, respectively are all lower when compared to the respective trailing numbers of 2.71, 2.21, and 11.41 which competitor Heinz observes.
Thus, regardless of opening up almost 109 years ago, Archer-Daniels growth rate still is supportive of a stronger share price in the future. In addition, Archer-Daniel is still producing at rates relative to revenue and cash which are significantly higher to the share price. Moreover, Archer-Daniels also has a relatively strong current ratio which is indicative of its ROE of 16% which is above the industrys average. Furthermore, with a beta near one, the 52 week return is close to that of the S&P 500 which, since many investors are predicting yet another positive return year for the broader indices, should indicate solid capital gain growth for this company. Thus, with the strong management team lead by G. Allen Andreas, there is a lot of potential, according to fundamentals, for this company to rise in 2007, sprouting optimism for investors looking for some short term gains.
To add some technical analysis to this argument, it would seem, after looking at a one year chart that this company is on the decline after a possible peaking in August of 2006. While such may be said as a good observation, nevertheless, there are some other indicators to point to the optimistic. For example, looking at both a 50 and 100 day simple moving average, it is evident that the current share price is below both trend lines which should indicate another argument for the case of being undervalued. In addition, this 20.8 billion market valued stock also has seen over the past six months, during its decline, volume on down days tending to be lower than the 50 day moving average, while high volume typically occurred during days when the stock rose. Such would indicate that there may be some bullishness remaining with investors and shareholders regarding this company, and the decline was only evident because of possible profit taking. Therefore, after examining the charts, profile, and fundamentals that Archer-Daniels provides, there is a surplus of evidence indicating a strong potential of performance relative to share price in the near future.
Dennis Biray presents advice on all kinds of topics ranging from finance and investing to fitness to sports. For more information email him at dbiray@gmail.com, or to view other articles written by him visit http://www.biraynetworks.co.nr