Why Archer Daniels Midland Can't Make Its Stock Grow

Just two points off its 52-week high, analysts expect Archer Daniels Midland  (ADM)  stock to keep going. I don't see that happening because the price is already too high.

Year to date, shares of ADM, currently at $44, are up 29%. The company is coming off a decent third quarter and management thought the fourth quarter would be even better. These guys are really excited about next year, too.

On Nov. 1, ADM reported third-quarter earnings of 59 cents per share, 13 cents better than the consensus estimate. Revenue fell 4.4% to $15.83 billion, $450 million below the consensus estimate of $16.28 billion. Operating income was $462 million and operating margin was 2.9%.

Agricultural Services profit was up 29.5% to $193. Profits in the Corn Processing segment were up 61.8%, but Oilseed Processing profits dropped 57% to $144 million. Earnings before income taxes were up $113 million, or 30.8% to $480 million.

Management was very positive on the fourth quarter and on next year because the size of the U.S corn crop. The harvest should help drive profits in the Ag service business as well as the corn processing business. The company has been seeing strong demand in the flavors, ingredient and sweetener business too.

In 2015, ADM created the Flavors and Ingredients (F&I) segment by acquiring Wild Flavors. Wild helps the company get into a higher growth, higher margin business and could be an important driver of growth in the future. The F&I segment reported an operating profit of $73 million, up 4.3%.

For the fourth quarter, analysts are looking for earnings of 84 cents on $16.81 billion in revenue, up 2.2%. And for the full fiscal year, earnings are expected to be $2.28, down 7.5%. Next year, the company is expected to post revenue of $63.8 billion, up 2% and earnings of $2.95.

At the current price, all the good news is priced in.

The stock is already trading at 15 times forward estimates. The five-year average multiple is 16, so maybe the stock can add a couple of points, but it's hard to see how ADM goes much higher. After all, ADM has an operating margin of just 2.9%, so who is in the mood to pay more than 15 to 16 times estimates for those earnings?

Frankly, 15 times seems like a pretty rich multiple to me. I'm not convinced ADM can harvest a higher price.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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