As the world's population balloons from seven billion today to nine billion by 2050, demand for food, ingredientsfor livestock feed, biofuels and environmentally friendly alternatives to traditional chemicals will grow. And with America, Britain, Europe and Japan using aggressive monetary policies to reignite their lacklustre economies, the supply of money is expanding much faster than food production.
So what's the best way to cash in on this theme? One way of getting cheap exposure to the food supercycle is via Archer Daniels Midland (ADM). It procures, transports, stores, mills and markets a wide range of softs' and is one of the world's largest processors of oilseeds, corn, wheat, biofuels and cocoa. Its operations circle the planet, from America to South America and Asia.
ADM has been hurt of late by the severe drought affecting American farmers. Earnings per share (EPS) in the last quarter (Q4) declined 25% to 38 cents on the back of higher input costs at its ethanol division and lower export volumes. Worse, weak harvests in the current quarter (Q1) could also hit profits in the coming year.
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But this temporary setback shouldn't cloud positive long-term fundamentals. The fall in the shares looks like a buying opportunity, given that ADM now trades on a skinny 11.3 times earnings and only slightly above its net tangible asset value of $26.3 per share. This looks far too low, given cost savings should keep returns above the group's overall cost of capital.
Archer Daniels Midland (NYSE: ADM), rated a BUY by Buckingham Research
Wall Street is anticipating turnover and underlying EPS of $92bn and $2.45 respectively for the year ending June 2013,rising to $95bn and $2.84 12 months later. I would rate the stock on a nine-times EBITDA. Adjusted for $5.3bn of net debt, that generates an intrinsic worth of $38 per share.
The firm faces the usual headaches associated with operating in commodity markets, such as volatile prices, increasing competition, geopolitical fears, foreign-currency risks and trade protectionism. Nonetheless, ADM's output should always be in demand and the firm also offers a sound hedge against inflation, which is a likely side effect of quantitative easing. Buckingham Research has a price target of $37 and Q1 results are scheduled for 29 October.
Rating: BUY at $27.20
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI, or phone 020-7633 3634 for more.
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