Friday, March 7, 2025
The Low-Risk High-Reward Stock to Buy Today
V
Valuemetrix
Disclaimer: This is in no way financial advice. I am not a financial advisor. Do your own research before making any final decision on investments.
Archer-Daniels-Midland Company (Ticker: ADM) is a global powerhouse in food processing and commodities trading. The company operates through three primary segments: Ag Services & Oilseeds, Carbohydrate Solutions, and Nutrition.
The Ag Services & Oilseeds segment is the core of ADM’s business, focusing on the processing and trading of agricultural commodities like soybeans, corn, and wheat. Carbohydrate Solutions produces sweeteners, starches, and ethanol, while the Nutrition segment caters to human and animal nutrition products, tapping into growing demand for health-conscious and sustainable offerings.
With a vast global network, ADM transforms raw crops into essential products for food, animal feed, industrial applications, and energy, making it a linchpin in the agricultural supply chain.
The stock is down over 51% from it’s highs in 2022, having been in fairly rapid decline since. I think the problems the company have been facing are severely overblown, and today I will explain why today is an attractive entry point for the stock. First let’s look at why the stock has been struggling.
ADM’s stock has had a rough couple of years, greatly underperforming the broader market and trading near its 52-week low. Over the past year, it’s faced a barrage of challenges that have dented investor confidence.
The decrease in earnings from processing soybeans into oil and meal has squeezed profitability, driven by oversupply and volatile commodity prices. Policy uncertainties, particularly around biofuels and international trade, have added further pressure, given ADM’s reliance on these markets.
The company’s latest earnings report didn’t help, revealing lower-than-expected profits and prompting a restatement of financials due to accounting irregularities. For 2025, ADM also guided adjusted earnings per share between $4.00 and $4.75, below analyst expectations, signalling a cautious outlook.
These factors have fuelled a large sell-off, leaving the stock valued 40% cheaper than the Consumer Staples sector despite its critical role in a vital industry.
This certainly looks bad, but is it enough to justify a 50% sell-off? The company is priced as if it was a dying company, while in reality it is a leader in its field. This discrepancy creates an opportunity to buy.
The company is tackling its challenges head-on with a cost-cutting program, targeting $200-300 million in savings over the next few years through operational efficiencies and workforce reductions. This could bolster margins even if market conditions remain tough.
Beyond the broader cost-cutting program, ADM is also implementing specific measures in procurement and production to lower expenses. This focus on efficiency aims to improve profitability and make the company more resilient to economic fluctuations.
ADM is also doubling down on its Nutrition segment, a high-growth area with potential for higher profitability as demand for plant-based and nutritional products rises. By expanding the Nutrition segment, ADM is reducing its dependence on volatile commodity markets. The shift toward plant-based proteins and health-focused products taps into a high-growth, high-margin market, addressing over-reliance on traditional segments.
Management is investing in technology, including AI and data analytics, to enhance supply chain efficiency. These tools help forecast demand, optimise pricing, and manage inventory, reducing the impact of disruptions and volatility.
The use of AI and machine learning also extends beyond the supply chain to decision-making processes like demand forecasting and pricing optimization. This tech-driven approach enhances operational efficiency and provides a competitive edge.
The ADM CIO said: “We’re consolidating and standardizing our ERP systems, moving towards SAP S/4HANA for our larger businesses and transforming the way we manage and use data.”
“This is not just an IT project. It’s about standardizing processes and data across the enterprise.”
To me this is extremely encouraging to hear, and shows the company will benefit from the advancement of AI.
Another attractive quality of ADM is that the stock boasts a 4.2% dividend yield, backed by over 20 years of consecutive dividend increases and a sustainable payout ratio, making it a standout for income-seeking investors
This is near an all-time high for the company’s divident yield, only beat by the crash during the start of the COVID-19 Pandemic. This again shouts undervaluation to me. They have consistently and rapidly grown their Free Cash Flow and dividend over the past 20 years, and I suspect they will continue to do so over the next decade.
ADM is a mixed bag, but one with enormous potential. It’s position in the essential agricultural sector, aggressive cost-cutting, and great dividend yield make it an interesting opportunity, especially at a valuation that seems to bake in much of the downside.
Add in a strong balance sheet and a respectable share buyback program, and it certainly seems that the market has overreacted to short-term problems
If ADM can navigate the current storm and deliver on its strategic goals - like boosting the Nutrition segment and stabilising margins - the stock could reward patient investors with a large upside, and a great dividend while they wait. That said, the risks are real, and near-term volatility isn’t going away.
Due to the Risk-Reward ratio being so favourable, I would rate the stock a strong buy. The stock is a large player in such an important industry, and so much downside is already priced in that it seems like a buy with little risk and great reward at current prices.
Let me know if you agree with me, Thank You for reading, and have a great day! 😊