Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

ADM: Pullback Offers Buying Opportunity In Stock That Feeds And Powers The World

By Andy HechtStock MarketsMay 17, 2022 17:05
ph.investing.com/analysis/adm-pullback-offers-buying-opportunity-in-stock-that-feeds-and-powers-the-world-112456
ADM: Pullback Offers Buying Opportunity In Stock That Feeds And Powers The World
By Andy Hecht   |  May 17, 2022 17:05
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

This article was written exclusively for Investing.com

  • ADM shares reached an all-time high in April
  • Broad market correction weighs
  • Earnings have been spectacular
  • A respectable dividend and booming market for ADM’s products
  • Implied and historical volatility - Option spreads could be attractive for risk positions
  • If you’re interested in upgrading your search for new investing ideas, check out InvestingPro+

Food and fuel prices have skyrocketed, which is bad news for consumers. For the companies that feed the world, input prices are likewise soaring, but so are profits.

The group of four large companies that control the import and export of agricultural commodities in the US is known as ABCD—an acronym for Archer-Daniels-Midland (NYSE:ADM), Bunge (NYSE:BG), Cargill, and Louis Dreyfus.

These companies produce, process, and distribute many ingredients that feed the world daily. The growing biofuel business is another integral part of their businesses.

While Bunge is a publicly traded company, Cargill and Louis Dreyfus are private firms. Archer-Daniels-Midland is the A-lister that trades on the stock market.

ADM’s slogan was “the supermarket to the world” for many years. These days, ADM not only feeds but also fuels the world with its agricultural businesses. In April, ADM shares reached an all-time high, but they have pulled back with the broad market.

We believe that the recent dip in ADM shares could be the perfect buying opportunity as the agricultural bull market looks likely to continue over the coming years.

ADM Shares Reached An All-Time High In April

Archer-Daniels-Midland shares fell to a low of $28.92 in March 2020 when the global pandemic gripped markets across all asset classes. In early 2020, agricultural commodity prices declined to lows along with other markets.

ADM Weekly Chart
ADM Weekly Chart

The chart shows the steady rally from March 2020 low that took ADM shares to a high of $98.88 on Apr. 21, 2022.

The long-term chart shows that the March 2020 low was a continuation of mostly higher lows since the 2008 financial crisis. The Apr. 21 peak was at a new record level. ADM shares were sitting at the $87.20 level on May 16, after a 11.8% correction from the most recent high.

Broad Market Correction Weighs

With inflation at an over four-decade high, US interest rates are rising. Higher rates push the US dollar higher against other reserve currencies, with the dollar index trading at the highest level since 2002. Last week, the dollar index probed above the 105 level.

Rising rates and a strong dollar are weighing on the overall stock market.

S&P 500 Daily Chart
S&P 500 Daily Chart

The chart of the S&P 500 index shows the decline from a record 4,818.62 record high on Jan. 4 to 3,994.60 on May 16, a 17.1% drop. ADM shares have outperformed the stock market over the period as the shares were at the $69.15 level on Jan. 4 and were 26.1% higher as of May 16.

While many commodity prices have declined because of higher rates and a stronger US currency, agricultural commodities remain at elevated levels as the war in Europe’s breadbasket is causing supply concerns. Ukraine and Russia export one-third of the world’s annual wheat supplies and are corn exporters.

Earnings Have Been Spectacular - Staying Ahead Of Rising Input Costs

ADM earnings have been impressive even though inflation is causing input costs to skyrocket.

ADM Earnings
ADM Earnings

Source: Yahoo Finance

The chart shows that ADM has beat analysts’ EPS forecasts over the past four consecutive quarters. The consensus estimates for Q2 2022 are at $1.64 per share.

ADM Annual Revenue/Earnings
ADM Annual Revenue/Earnings

Source: Yahoo Finance

Annual revenues and earnings increased in 2021, and the prospects are for a continuation of the trend in 2022, with grain, oilseed, and biofuel prices at the highest level in years.

A Respectable Dividend And Booming Market For ADM’s Products

A survey of 12 analysts on Yahoo Finance has an average price target of $95.58 for ADM shares, with forecasts ranging from $67 to $111 per share.

ADM is an 800-pound gorilla in the worldwide agricultural markets. The highest prices in years and rising potential of shortages caused by the war in Ukraine mean the demand for ADM products will continue to soar. The most recent price dip in the shares could be a golden buying opportunity as I expect the stock to rise beyond the top end of analysts’ anticipated range at the $111 per share level.

However, the rocky stock market could cause further weakness for ADM shares. ADM pays shareholders a $1.60 dividend, translating to a 1.83% yield at $87.20 per share. The stock has a 0.80 Beta, meaning it is less tied to the overall stock market than companies with a 1.0 Beta.

Implied And Historical Volatility - Option Spreads Could Be Attractive For Risk Positions

As of May 16, implied volatility on ADM put and call options was higher than the historical volatility level. Implied volatility measures the market’s price variance expectations, while the historical metric reflects the past.

ADM Options Overview
ADM Options Overview

Source: Barchart

The chart shows the higher implied versus historical volatility levels on at-the-money options. Out-of-the-money options tend to trade at even higher implied volatility because of the speculative interest in the leveraged call and put options.

In the current environment, buying call spreads or selling put spreads on ADM shares could offer an advantage that limits risks. The call spread offers an upside potential of the difference in strike prices minus the debit. Purchasing a bull call spread for a debit limits the risk of a further fall to the premium paid for the spread and involves buying an at-the-money call option and selling an out-of-the-money call option for the same expiration date.

Selling a bull put spread involves selling an at-the-money put option and buying an out-of-the-money for the same expiration date. The potential profit is limited to the premium received, while the risk is the difference between the strike prices minus the credit of the premium received.

I favor the long side for ADM shares. The current level of implied volatility makes option spreads an alternative to outright purchases of ADM shares. If you choose to buy the stock, we advise you to leave plenty of room to add on as further declines in the current weak stock market environment may offer additional buying opportunities. ADM is a supermarket to the world, and global agricultural supplies are likely to suffer over the coming months and years. Higher prices are bullish for ADM and the other ABCD companies that dominate the sector.

Looking to get up to speed on your next idea? With InvestingPro+, you can find:

  • Any company’s financials for the last 10 years
  • Financial health scores for profitability, growth, and more
  • A fair value calculated from dozens of financial models
  • Quick comparison to the company’s peers
  • Fundamental and performance charts

And a lot more. Get all the key data fast so you can make an informed decision, with InvestingPro+. Learn More »

ADM: Pullback Offers Buying Opportunity In Stock That Feeds And Powers The World
 

Related Articles

ADM: Pullback Offers Buying Opportunity In Stock That Feeds And Powers The World

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email