Archer-Daniels-Midland: Solid Results But Accounting Probe Clouds The Picture

Archer-Daniels-Midland (NYSE:ADM) has been in the news for all the wrong reasons lately. The accounting probe is still hanging over the company like a storm cloud. This has already scared many investors and led to a share price drop of more than 20 percent year-to-date.

But investors should also keep their eyes on the road ahead: ADM released its Q4 2024 and full year results on the 12th of March, and these results look relatively good compared with the pessimism currently surrounding the stock. In this article, I will go through the Q4 and full year 2023 results and also pay attention to the outlook of the company for 2024, which is expected to become a challenging year. I believe that ADM could be a good investment for long term investors willing to look through the current haze of uncertainty.

Recap and introduction

A couple of months ago I wrote a previous article about ADM, where I explained why I believed that ADM looked like a very solid long-term investment. I also mentioned that I expected a share price of around $100 would be a fair value.

Well, this was one badly-timed prediction, as last January, ADM placed its CFO on administrative leave pending an investigation on accounting practices. Lots has been said and written about this, and although these accounting practices investigation seems to be limited to the nutrition segment (less than 10% revenue), it is almost always a bad sign for a company if the Department of Justice gets involved. Also noteworthy: The results of ADM’s nutrition business have had an outsized impact on executive bonuses.

As the shock of this accounting probe sank in, ADM’s shares tanked to a price of slightly above $50, a far cry from the $100 I believed would have been a fair price in September last year. These accounting problems are not likely to be solved quickly, and even if they were, I believe the saying ‘trust arrives on foot and leaves on horseback’ applies here. The accounting probe will likely continue to cloud ADM’s picture for the foreseeable future. This is something that we have to deal with as investors.

Let us take a look at ADM’s Q4 2023 financial results and look forward to the rest of the year. I will also provide my view on the company and what to expect from it.

Q4 Results

Archer-Daniels-Midland released its Q4 earnings, and as a result, the stock experienced a minor jump. Although the company missed both its earnings and revenue, the market seemed to conclude that the numbers were better than expected (or less bad). Let us briefly walk through what I believe are the most important metrics from ADM’s results:

• GAAP Q4 2023 earnings per share of $1.06, a 42% reduction compared to 2022.
• Non-GAAP earnings per share of $1.36, a 30% reduction compared to 2022.

As the company mentions, the differences between 2022 and 2023 earnings are mostly explained by lower crush and origination margins, lower equity earnings and one-time legal recovery benefits.

• Over the entire year, the decrease in (non-GAAP) earnings per share looked to be less severe, with a total EPS of $6.98 in 2023 compared to $7.85 in 2022, a decrease of almost 9 percent.
• Revenue was a total of $22.98B in Q4 2023, compared to $25.94 in Q4 2022, amounting to a decrease of 11.5%.
• Over the entire year, revenue was $93.94 in 2023 compared to $101.56 in 2022, a decrease of 7.5%.
• ADM’s nutrition division booked a loss of $10M, while also mentioning that “2022 Ag Services & Oilseeds, Carbohydrate Solutions, and Nutrition segment operating profits have been revised to reflect immaterial error corrections with no change to total Adjusted Segment Operating Profit.”
• Cash flow from operations has slightly decreased, as you can see in the picture from ADM’s earnings call presentation that I pasted below.
• Also, cash returned to shareholders has strongly increased in 2023, most notably from increased share repurchases.

So, in short: both ADM’s revenue and earnings decreased in 2023, more so in Q4 than in the other quarters. In my view, the company’s earnings do not look too terrible, especially considering the negative expectations of the market. And although ADM’s nutrition business booked a loss and needed to revise its previous results, at the moment the accounting problems seem to be contained in this business segment. But as the investigation is going on, there is no way for investors to be certain about this. We cannot dismiss the risk that the accounting problems get bigger than they currently are.

Outlook and expectations for the future

Let us take a look at the outlook that Archer-Daniels-Midland provided for 2024, a year the company is expecting to become a challenging one:

• Earnings per share are expected to decrease further to $5.25-$6.25. What is notable here is the relatively wide range of this number, signaling uncertainty.
• Costs, interest expenses and adjusted net debt/EBITDA are all expected to increase.
• The expected decrease in number of shares outstanding is a direct result of the announcement of ADM to authorize an additional $2B to its stock buyback program.

As an investor, this outlook does not look particularly rosy. To the contrary, ADM seems to be heading for a challenging 2024, and coupled with the accounting probe, there seems to be a real risk of a downward spiral. But together with all this risk, I can also see opportunity in ADM. Even with the most pessimistic 2024 earnings of $5.25, the company’s shares are currently valued at a forward P/E ratio of less than 11. At $6.25 2024 earnings per share, the forward P/E ratio is even solidly below 10. Also, the authorization of the $2B share repurchase program seems to arrive at an opportunistic moment with the share price down more than 20 percent year-to-date.

Takeaway

The accounting probe will continue to have a major impact on ADM’s stock on the short and mid term, and the company will need to gain back trust from investors and the market. But at the moment I believe it seems that the accounting probe is limited to the nutrition business. Also, the fact that growth numbers of the nutrition business had an outsized impact on executive bonuses is worrying (but I’ll let the DoJ deal with this), but it might make it more likely that the rest of the business of ADM (90% revenue) could be unaffected by the accounting problems. But since the investigation is still going on, we cannot dismiss the possibility that the accounting problems are more severe than they seem at the moment. Until this investigation is settled, shares will continue to trade with a discount.

Apart from the uncertainty stemming from the accounting probe, ADM’s results look solid, and although the 2024 outlook does not look very positive, we need to consider that this year is expected to be a challenging one. Keep in mind that Archer-Daniels-Midland remains a cyclical company and relatively large fluctuations in share prices and profits are expected. But in the meantime, investors get paid a solid and growing dividend.

For long-term investors willing to look past the short- and mid-term problems, shares of ADM look quite attractive at the moment. The worst-case forward P/E ratio is still below 11, and yield a solid dividend of 3.5 percent at the moment. ADM is not a get-rich-quick investment, but is supposed to be a boring, slowly-growing compounder. A stock that is an attractive target for dividend growth investors and people with a particular long-term mindset, since the market and moat of ADM aren’t going anywhere.

I am still rating Archer-Daniels-Midland a buy, but I cannot provide a value of what I believe to be a fair share price because of all the uncertainty surrounding the company at this moment. The company looks cheap, but please consider the risks.