Archer-Daniels-Midland: Don't Buy Into Investigations (Technical Analysis)

seekingalpha05-04

Archer-Daniels-Midland stock currently yields far above its historical range.However, its situation reminds us of the old adage of “don't buy into lawsuits”.The stock is facing investigations by the ...

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As you can see from the charts below, ADM is currently yielding almost 3.4% (shown by the solid red line). This is not only far above its historical average (represented by the grey dotted line) but also close to the +1 standard deviation level (represented by the orange line with symbols). BTW, ADM is a dividend champion with more than 25 years of consecutive dividend increases. Thus, its dividends also serve as a good indicator for its true economic earnings and dividend yields as a good valuation indicator. We see many analysts use above-average yield as a key consideration in their bullish thesis. However, for us, our experience has taught us the opposite. Whenever the yield/valuation is far out of the ordinary range, instead of jumping on the yield, our minds immediately start wondering \"What is wrong?\". Author And in the case of ADM, it is not difficult to find out the issues, which are twofold to us: the ongoing DOJ and SEC investigations and the strong EPS headwinds. In the remainder of this article, we will argue why the picture facing ADM is so mixed (and hence our HOLD rating) given these risks. ADM stock EPS headwinds Wall Street has a pretty gloomy outlook for its EPS growth in the coming years. More specifically, the following chart describes consensus EPS estimates for ADM stock in the next 2 years. As seen, the consensus EPS estimates for ADM stock point to a large decrease in FY 20224 of almost 20%. The decline is expected to continue into FY 2025 at a much slower pace. All told, these projections point to a mid-point of EPS estimate of $5.58 in FY 2025. The implied forward P/E ratio for ADM is expected to be 10.64x by then, actually not that discounted from its historical mean (about 12x). Seeking Alpha I see good reason for such pessimism and do not think the discount in valuation has fully priced in the uncertainties. My number one concern involves the wide range of uncertainties surrounding its nutrition segment. Secondly, I also see a high degree of uncertainties for the margins in its core Ag processing operations. ADM benefited to some extent from high ag commodity prices in recent quarters. But given the ongoing macroscopic headwinds (high inflation, labor, fuel costs, plus geopolitical conflicts), I see good odds for margin renormalization. Above all else, ADM's accounting practices are facing DOJ and SEC investigations. The discovery of financial reporting errors was made in January this year, causing a large correction in its stock prices. The problem occurred in the nutritional segment, where accounting errors were detected within intercompany sales. According to this Reuters report (the emphases were added by me), In March 2024, ADM corrected six years of financial data after an internal investigation found some sales between business units within the company were not recorded properly. ADM said it had overstated annual operating profit in the Nutrition segment by as much as 9.2%. The investigations are still ongoing and remind us of the old adage of \"not buy into lawsuits\". First and foremost, such investigations cast a shadow of uncertainties on the finances including the EPS forecast mentioned above. Second, the downside can be difficult to estimate. For example, if the investigation finds wrongdoing by AMD, the company could face fines or penalties, which again adds to the uncertainties of the above EPS estimates. ADM stock prices: I see the knife still falling Besides the above risks in its business fundamentals, we are also seeing technical signs that indicate more downside potential for ADM stock prices in the near future. The following chart shows the price-volume pattern of ADM stock in the past year, plotted on a daily basis. To start, you can already see a large selling pressure before the investigation surfaced in January. The stock prices were already in a clear down-trending pattern then. After the nosedive in January, the stock prices rebounded a bit. But we are afraid the selloff is not over yet for several reasons. First, ADM's current stock price of $59 is still below its 20-day moving average ($61) despite the rebound, a textbook sign of a bearish trend. Second, the rebound was not accompanied by strong volumes, especially compared to the shares traded during the correction in the January and February timeframe. Lastly and most importantly, I want to draw your attention to the trading windows highlighted by the yellow and green boxes below. The yellow box shows the price range that has cumulated the largest trading volumes before the investigation and the green box the range after. Given the high volume, these price ranges represent key support levels in my view. ADM's current stock price has obviously broken the ~$72 support level already. It is not far above the $52~$54 level and there is a good chance that it can break this level too given the relatively small trading volume at prices above this level. Source: StockCharts.com Other risks and final thoughts On the positive side (that is, besides the high yield and valuation discount), ADM offers several unique strengths in the agricultural processing universe. The top one for us is its focus on value addition and subsequently customer relationships. While many processors focus on just commoditized agricultural products, ADM goes beyond by offering value-added solutions. This includes research and development to create innovative products, product development specific to customer needs, packaging solutions, and even marketing assistance. By helping customers create unique final products, ADM becomes a strategic partner rather than just a supplier.  All told, we don't see a clear direction for the stock before the SEC/DOJ investigation is fully resolved. As such, we rate the stock as a HOLD. For existing investors, there is nothing wrong with holding a sector leader at a discounted P/E ratio and an above-average dividend yield. Additionally, ADM's diversified business model and strong global presence position it well to navigate volatile market conditions. However, for potential investors, the near-term EPS growth outlook is uncertain. I see good reasons for EPS declines in the next one or two years. Furthermore, the ongoing SEC and DOJ investigation adds a layer of uncertainty both for its EPS outlook and for the investor sentiment.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2432197428"}