Valuation analysis for Archer Daniels Midland Company (NYSE:ADM)

In financial circles where valuation matters investors typically like to see a parallel relationship between earnings and revenue.  This relationship is not expected to be one for one, but if earnings are increasing at the same time revenues are declining investors who look for value often become concerned.

ADM Archer Daniels Midland Revenue

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For Archer Daniels Midland Company (NYSE:ADM), our fair value analysis shows a discrepancy between the direction of revenue and the direction of earnings.  Revenues have been declining while earnings, although neutral over the past handful of years, have recently been increasing.  This relationship makes a valuation observation that is based on earnings less reliable, but nonetheless important to observe.

ADM has experienced nice earnings growth recently, and according to our yearly growth observations, which include trailing 12 month data and exclude onetime events to focus on earnings from operations, as of the last report ADM was growing at about 31%.  About a year ago the growth rate was -11%, so the significant rebound in earnings growth shown in our chart below is solid.

ADM Archer daniels Midland Earnings EPS Growth

When we compare that growth rate to the PE multiple levied on ADM at this time, about 16.4 times earnings, the stock looks extremely cheap, especially if it can maintain that growth rate.  That begs the question, will ADM continue to grow earnings at that pace going forward.

Technical take:

According to our real time trading report for ADM, the stock appears to be right in the middle of its longer term trading channel, but the stock has recently tested a level of longer term support so the next logical progression would be higher towards longer term resistance.  There are no buy signals or sell signals immediately according to our combined longer-term analysis for ADM, and there will not be until such time as the stock either declines to test support again or increases to test resistance.  For those who own it from support the stock remains a hold, but at current levels we would not be buyers.

Summary:

Although ADM has had solid recent earnings growth, the direction of revenue is concerning and we do not expect the company to be able to continue to grow earnings at its current pace if revenues continue to decline.  Analysts are currently expecting revenue growth of about 13% in the year ahead, which would still make the current PE multiple relatively attractive, but we do not trust companies whose revenue trajectory diverges from its earnings.  Given the fact that there are no immediate technical buy or sell signals either, we would comfortably and absolutely avoid ADM.

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