Archer-Daniels-Midland (NYSE:ADM) touts itself as a titan in the nutrition industry, renowned for its processing of grains and crops, integral components in a multitude of food products. Headquartered in Chicago, IL, the company’s operations span the nation, collaborating with top food enterprises to produce consumables for humans and animals alike. Nonetheless, a recent pronouncement has unsteadied investors’ resolve.
The bombshell dropped on January 21, 2024, intimating that the company had placed its CFO on administrative leave and launched an investigation into certain accounting procedures within its nutrition division. Simultaneously, it pledged cooperation with the SEC. Archer-Daniels-Midland operates in three key segments: ag services and oilseeds, carbohydrate solutions, and nutrition. The latter, in particular, had been the company’s most rapidly expanding arm. Consequently, its current plight presents an intriguing opportunity for discerning investors. Let’s delve deeper into the repercussions of the recent turmoil:
The Catastrophic Plunge:
The graph paints a dire picture. The stock, once comfortably perched at around $70 per share, careened on Monday, January 22, 2024, suffering a gut-wrenching descent – shedding approximately 25% of its value and bottoming out at a new 52-week low of $51.49 per share. The telltale relative strength index, or “RSI,” now languishes at an abysmal 10. When was the last time we witnessed such a woeful RSI? Surely, this portends a state of extreme overselling, given that stocks typically register as oversold when the RSI hovers around 30 or lower. An RSI of 10 signifies an egregiously oversold stock.
Prognostications:
With the stock languishing at such immoderate levels of overselling, a palpable upswing could be imminent. Yet, it would be judicious to brace for potential further tumult and unwelcome news. The imminent adversities may materialize in the form of a spate of analyst downgrades, some of which are already in evidence. Moreover, the specter of class action securities lawsuits looms ominously, with extant filings portending a flood of such litigations. This cumulative cascade of downgrades and legal wrangling could exert sustained downward pressure on the stock. Nevertheless, a juncture is expected where the stock will demonstrate resilience against downgrades and litigation, prompting a partial rebound, possibly propelled by short covering as the market recognizes that the stock has plumbed the nadir. The stock might then find a modicum of relief, albeit remaining ensnared within a trading range until the company emerges unscathed from the accounting malaise and the SEC inquiry, a process that may span a couple of quarters or more. The company is optimistic about concluding the accounting scrutiny by late February 2024. Chronicling this development, Seeking Alpha’s news editor Joshua Fineman penned a recent illuminating article, detailing:
“The probe is looking at inter-segment transactions at Archer-Daniels-Midland (ADM), according to CNBC’s David Faber. ‘The numbers may not change,’ Faber said.”
This relatively expeditious resolution to the accounting imbroglio and the tantalizing prospect that “the numbers may not change” could be viewed as a boon for shareholders, possibly casting the almost 25% slump in the stock as an overreaction.
A Stratagem for Acquisition:
Unfazed by the tempest catalyzed by the accounting conundrum, I have commenced accumulating shares at the $51 mark, with plans to incrementally bolster my position in the ensuing days. Additionally, I am contemplating the vantage of selling put options to capitalize on the premiums. If my holdings reach a significant magnitude and the stock undergoes a considerable rally, I might divest a portion of my holdings, but not without retaining a substantive tranche for the long haul. The edifice of food production ranks among the most resilient and pivotal segments inviting investment. I envision the accounting issue as an isolated and transient setback that will soon recede into oblivion. It is conceivable that this conundrum will exert negligible influence, being confined to a solitary arm (nutrition) of this colossal food producer, slated for resolution in the forthcoming quarters.
Projected Earnings and Financial Fortitude:
Archer-Daniels-Midland has been the architect of robust financial performances in recent years. Earnings for 2023 are poised to exceed $6.90 per share, and analysts foresee earnings of $6.08 for 2024, and $6.20 for 2025. Moreover, the balance sheet exudes solidity, flaunting a handsome cash reserve of approximately $1.5 billion and a debt load of $9.5 billion. Boasting an annual revenue north of $90 billion and entrenched in the relatively stable environs of the food industry, the company’s balance sheet radiates robustness. Prospective resurgence in the stock is underpinned by aspirational plans for share buybacks totaling nearly $5 billion, sanguine single-digit revenue escalation, and a pleasingly shareholder-oriented stance on dividends.
