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Is Archer-Daniels-Midland a Great Stock for Value Investors?

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Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Archer-Daniels-Midland Company (ADM - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Archer-Daniels-Midland has a trailing twelve months PE ratio of 22.0, as you can see in the chart below:

This level does not compare favorably with the market at large, as the PE for the S&P 500 compares in at about 19.9. If we focus on the stock’s long-term PE trend, the current level puts Archer-Daniels-Midland’s current PE ratio close to its highs over the past five years, with the number having risen rapidly over the past few months.

The reason for the high P/E ratiois that price has been consistently rising over 2016 while earnings over the same period have declined. Both of these trends have served to inflate the P/E ratio. However, the company's earnings are expected to resume its growth trajectory 2017 onwards, and the company’s trend over the past five years shows that price has more or less tracked earnings. Thus, we feel that strong price appreciation is in the cards for this company. However, as the current level seems overvalued, we believe investors should await a better entry point on the stock.

The stock’s PE compares favorably with the Zacks classified Agricultural Operations industry’s trailing twelve months PE ratio, which stands at 23.1. At the very least, this indicates that the stock is slightly undervalued right now, compared to its peers.

We should also point out that Archer-Daniels-Midland has a forward PE ratio (price relative to this year’s earnings) of just 15.38, so it is fair to say that a slightly more value-oriented path may be ahead for Archer-Daniels-Midland stock in the near term too.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Archer-Daniels-Midland has a P/S ratio of about 0.4. This is significantly lower than the S&P 500 average, which comes in at 3.0 right now. Also, as we can see in the chart below, this is close to the highs for this stock in particular over the past few years, suggesting that the stock is overvalued from a P/S perspective.

Broad Value Outlook

In aggregate, Archer-Daniels-Midland currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes Archer-Daniels-Midland a solid choice for value investors, and some of its other key metrics make this pretty clear too.  

For example, the PEG ratio for Archer-Daniels-Midland is just 1.81, a level that is comparatively lower than the industry average of 3.36. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, ADM is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Archer-Daniels-Midland might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘C’ and a Momentum score of ‘A’. This gives ADM a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been mixed at best The current year has seen none of the estimates going higher in the past thirty days compared to one lower, while the next year estimate has one up and none down in the same time period.

This has had a modest impact on the consensus estimate though as the current year consensus estimate has inched lower by 0.4% in the past one month, while the net year estimate has risen by 2.2%. You can see the consensus estimate trend and recent price actionfor the stock in the chart below:

This mixed trend indicates that while the stock’s growth story is intact over the medium term, analysts have some apprehensions about the stock in the immediate future.

Also consider the fact that the company boasts a Zacks Rank #2 (Buy), which indicates robust fundamentals and expectations of outperformance in the near term. Thus, we can say that while investors may expect slight short-term pain, Archer-Daniels-Midland remains a formidable value proposition, with strong supporting growth prospects.

Bottom Line

Archer-Daniels-Midland is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Boasting a good industry rank (Top 32% in more than 250 industries) and a good Zacks Rank, the company deserves attention right now.

Furthermore, over the past year, the Zacks categorized Agricultural Operations industry has clearly outperformed the broader market, as you can see below:

So, it might pay for value investors to delve deeper into the company’s prospects, as fundamentals indicate that this stock could be a compelling pick.  

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