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Bull of the Day: Archer Daniels Midland (ADM)

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Archer Daniels Midland (ADM - Free Report) is a Zacks Rank #1 (Strong Buy) that procures, transports, stores, processes, and merchandises agricultural commodities, products, and ingredients. ADM is one of the leading producers of food and beverage ingredients, as well as goods made from various agricultural products

The stock has seen selling over the last couple months as money has been rotated out of last years winning sectors and into 2022 losers such as tech. The stock is now down over 15%, but the selling might not last long as ADM is coming off an earnings beat and is seeing analyst estimates drift higher.  Additionally, ADM has hit technical support at a trend line that formed at the COVID lows.   

About the Company

Archer Daniels Midland was founded in 1902 in Minneapolis, MN. The company is now headquartered in Chicago, Illinois and employs over 38,000. ADM has a market cap of $45 billion and has a Forward PE of 12. The company pays a dividend of almost 2%.

ADM operates through three segments: Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition. The company also engages in the agricultural commodity and feed product import, export, and distribution; and structured trade finance activities.

The stock has a Zacks Style Score of “A” in Value and Growth.

Q4 Earnings Beat

In late January, the company reported an earnings beat of 17%. This was the 14th straight EPS beat, a streak that started back in 2019.

Digging into the fourth quarter, the company reported EPS of $1.93 v the $1.64 expected. Revenues came in at $26.2B, which was as expected. Strong global demand for crops and soy crushing margins were cited as reason for the beat.

ADM saw a 46% y/y increase in operating profit in their Ag services and Oilseeds unit.

Management commented they are committed to returning cash to shareholders and announced they were hiking their dividend by 12.5%. The company guided FY23 capex flat y/y and planned share buybacks at $1.0B vs the $.5B last year.

Management sounded bullish for 2023, with the CEO expecting strong margins in starches, sweeteners, and wheat flour in Q1. ADM expects FY23 growth to be over 10%.

Analyst Estimates

The stock sold off about half a percent after earnings. Since then, it has dipped even further, falling about 5% since earnings were released. The current quarter saw estimates dip a tad, but analysts remain bullish long term.  

For next quarter, estimates have shot up 4% over the last 7 days, moving from $1.62 to $1.69. For the current year, estimates have gone higher by 2% for that same time frame.

The longer-term trend is very positive, with next year’s estimates moving up 16% over the last month.

The Technicals

2023 has seen money flow into the beaten down names from last year, while rotating out of those strong 2022 performers. Tech has been hot, while commodity related stocks have been weak.

ADM has not been spared, with the stock being sold hard and down 9% the first three days of the trading year. Eventually this rotation will stop and the stock already seems to be stabilizing at technical support.

While the 200-day moving average broke in the first week of the year, the $80 level is holding. If you draw a trendline from the lows since March 2020, you can see the line has hit for the first time since July and the selling has stalled.

Additionally, the current price is the September support zone and a 61.8% Fibonacci retracement drawn from the July lows to October highs.

Bottom Line

The weakness in ADM so far in 2023 can be attributed to the sector rotation out of last years winners into losers. For investors that expect the long-term trend to continue, the stock has dropped enough to gain a solid entry point.

Earnings momentum, valuation, dividend growth are factors that should offer the stock strong support for the rest of 2023.

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