Replies to post #4 on Archer Daniels Midland Co (ADM)

[frenchee]

Archer Daniels Shares Falter
SHARES OF ARCHER DANIELS MIDLAND were down 4% in midday trading Monday following a Barron's article which argued that despite the crop processor and biofuel producer's positive outlook, its valuation is unsupported by its margins and profit forecasts.

In "Harvest Time for ADM Shares," Barron's Michael Santoli wrote that there was a significant chance that new capacity in ADM's key businesses would soften pricing and hurt margins, producing a meaningful shortfall to the fiscal 2008 earnings forecast of $2.55 a share.

ADM is plowing new capital into an aggressive ethanol-production expansion program while the economics of ethanol supply and demand are unfavorable.

Moreover, a spate of insider selling at the company hardly seems to validate the Street's overwhelming bullishness. It also doesn't make the stock's current valuation seem like a fruitful entry point.

[frenchee]

This stock is cheap relative to its peers...

P/E Ratio: 11.43

P/E Ratio High 26.30

P/E Ratio Low 10.00

P/E Ratio vs. Industry: 52.59%

[frenchee]

At ADM, Crop Prices Cut Both Ways
A WSJ NEWS ROUNDUP
February 5, 2008; Page C7

Higher crop prices were a double-edged sword for Archer Daniels Midland Co. in its fiscal second quarter.

Its ethanol production continued to be squeezed by lower prices for the biofuel and higher corn costs, but the company posted a 7% profit rise as bumper U.S. crops helped it capitalize on higher prices for grains, including corn, through its grain-handling services.

Operating profit in its agricultural-services business, which stores and moves a host of commodities, more than doubled to $315 million from $131 million in the quarter ended Dec. 31 on handling North American crops as the rest of the world experienced shortages.

"The size of the crop this year," Chief Executive Officer Patricia Woertz said, "has been something that has given us tremendous opportunity."

The Decatur, Ill., company's revenue jumped 50%, but its gross profit margins slipped to 5.7% from 8.3% as the cost of products sold surged.

Profit in ADM's corn-processing business slipped 18% to $275 million in the recent quarter, hurt mainly by lower ethanol prices. Profit for sweeteners and starches, such as high-fructose corn syrup used in soft drinks, slipped 3% to $147 million.

ADM's oilseed-processing profit grew 14% to $219 million due to strong global demand for protein meal and oil. In the company's "other" segment, which includes a handful of businesses, the operating profit rose 3.5% to $146 million.

The company also said corporate charges related principally to inventory valuations more than doubled to $225 million in the recent quarter from $107 million in the year-earlier period.

Its shares were down $1.30, or 2.9%, to $44.20 in 4 p.m. New York Stock Exchange composite trading. Shares have had a strong run over the past year as government incentives for biofuels helped increase planted acres and raise crop prices, while emerging-market demand for staple grains, particularly in China, has been growing.

Recently, however, it has seen the profitability in its corn-processing business slip due to high corn costs and a rapid bulking up of ethanol-production capacity.

[frenchee]

Weekend Investor
Ethanol Stocks Bust but Stay a Risky Buy
By HERB GREENBERG
March 15, 2008; Page B2

The good news for VeraSun Energy Corp., one of the country's largest ethanol producers: Its most recent quarter beat gloomy analyst estimates.

The bad news: Even with the better-than-expected results, profit for the fourth quarter tumbled 81% as the economics of ethanol (for the time being, at least) remained upside down.

Such is life in what had been the fast lane of an industry that emerged on Wall Street several years ago on a wave of corn-fed momentum after decades of a quiet life back home in the Midwest.


It has since been a classic boom-to-bust stock story, with shares of anything remotely related to ethanol trading at a fraction of what they had been at their highs, which for most was the day they went public during a frenzy that lasted from the summer of 2006 to early 2007.

Analyst Mark Miller of William Blair & Co. perhaps summed it up best on VeraSun's fourth-quarter earnings call this past week when he commented, "This is the first conference call where the stock has traded below book value." The same could be said for the other major ethanol pure plays: Aventine Renewable Energy Holdings Inc., Pacific Ethanol Inc. and US BioEnergy Corp., which is about to merge with VeraSun.

Mr. Miller, in noting the below-net-worth value, wondered whether management had anything to say about the stock's slide, since it implied "you are not going to earn your cost of capital...." Chief Executive Don Endres, who founded the South Dakota company and whose family has been in farming for generations, responded that he believed "there is a lot of misinformation that's out there" that has scared small investors, which he believes is "unfortunate, because this has so much potential."

That, as you might have heard, is subject to much debate. Ethanol's from-out-of-nowhere boom was tied almost exclusively to its use as a replacement to methyl tertiary-butyl ether, a gasoline additive that had been proved to be a carcinogenic groundwater pollutant. "These guys IPO'ed when corn was $1.80 to $1.90 [a bushel] and ethanol was $4.50 a gallon because of a shock to the system: The momentary disconnect when MTBE fell off," says Ian Horowitz, an analyst for Soleil Securities. "If I'm Valero, I don't care what I have to pay for a replacement product, I just know I have to get it in. It wasn't a pricing decision."

Now, with corn at $5.64 a bushel and ethanol at about $2.60 a gallon, he says "it's all digested and worked through," which means ethanol becomes just another commodity. Modern refiners typically can produce about 2.8 gallons of ethanol from a bushel of corn. Like any commodity, Mr. Horowitz adds, ethanol is dictated by its own set of variables over which it has no control: oil, corn, natural gas and the spread between ethanol and gasoline.

There also are uncertainties over future government mandates for the use of ethanol, subsidies to refiners for using ethanol, the possibility that tariffs on imported ethanol will be reduced or eliminated and a host of other concerns that have cropped up lately.

"There are a lot of emotional issues people raise," Mr. Endres, VeraSun's CEO, told me by phone. Ethanol, he says, is now "10% of the fuel industry, so we're up on the radar of a whole lot of groups that have a large amount of resources that they can use to push against us."

He believes that other worries, such as high corn prices and overcapacity, will work themselves out in the next year or two. "We're forging new ground and a new world in energy prices," he says. "We believe this is a new business opportunity."

Maybe it is, but a bigger question is whether at these prices ethanol stocks are the bargain they appear to be. Soleil's Mr. Horowitz -- who was publicly dubious of most ethanol companies before they went public -- doesn't think they are. He believes a safer approach is through diversified agricompanies such as Archer Daniels Midland Co. or Andersons Inc.

If ethanol goes bad, "it implies some other part of their business is working very well," he says. "They don't care if they're making money in biodiesels or ethanol." Too risky, they no doubt realize, to bet the farm on.

[frenchee]

ADM coming up on some significant support on the weekly charts in the iBox. Time to nibble?