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Mutual Investment Club of Cornell
Emdeon Q4 Earnings
Revenue of $275.7 million (increased 15.5% over 2009 Q4 revenue)
Revenue cycle management and payment services solutions continued to lead growth
Completion of Chamberlin Edmonds acquisition in Q4 broadens revenue cycle management offering
Strategy of layering value-added products and technology-enabled services on top of leading health information network
Mutual Investment Club of Cornell
5
China Inflation Update
Dec 2010 Inflation: 4.6% (Target: 4%) Jan 2011 Inflation: 4.9% (Target: 4%) People’s Bank of China (PBOC) has
boosted reserve requirement ratio for commercial banks 8 times since Q1 2010 (19.5%)
PBOC has increased interest rates 3 times since Q1 2011 (6.06%)
Government: will maintain at 4% in 2011
Mutual Investment Club of Cornell
6
China Inflation Update
Key Areas Skyrocketing food prices: overall costs
increased 10.3% in January Housing costs: increased 6.8% in January
Mideast Violence Increases in price of oil putting further
inflationary pressures on Chinese products
Mutual Investment Club of Cornell
7
China Inflation Update
Government Fears Population growing increasingly unhappy
as rising cost of living “endangering the Chinese dream”
Government support closely tied to economic success, inflation seen as a catalyst for unrest
“Jasmine Revolution” – recent online calls for protest, evidence of discontent
Controlling inflation and restoring price stability is a critical priority
Mutual Investment Club of Cornell
8
China Inflation Update
Expectations A further increase in the reserve
requirement, up to 23% Ramping up existing agricultural capacity An additional increase in the interest rate Massive investment in low-cost housing:
10 million units planned for 2011 5 year GDP growth target: 7% “Keeping prices stable is the top
macroeconomic control goal for this year” - Wen
Mutual Investment Club of Cornell
Fiscal Budget
2011 budget deficit to hit record $1.65T (10.9% GDP), Congress debate over spending cuts Deadline March 18
Obama’s proposed budget for 2012: Slash deficit by $1.1T in the next 10 years ,
two-thirds from spending cuts and rest from tax revenue “Doesn't even scratch the surface.” – Ward
McCarthy, Chief Financial Economist, Jefferies & Co. 2012 Budget to fall to $1.1T in 2012 Does not address entitlements (43% of
budget)
Mutual Investment Club of Cornell
Debt Ceiling
Theoretically, a way for Congress to control debt the US Treasury takes on
Currently at $14.29 trillion Expected to reach between Apr. 15 and May
31 No ceiling hike means default Bernanke: “We’ve never had a failure to
raise the debt limit.” Raised 37 times since 1980
Jan 27: S&P downgraded Japan to AA-minus: a warning?
Mutual Investment Club of Cornell
12
Unemployment Update
Unemployment rate: 8.9% Jobless claims under 400K Few workers who stopped looking for
jobs have returned to the labor force Unemployment rate may rise
True unemployment rate still close to 16% Counts underemployed, unemployed who
have stopped working
Mutual Investment Club of Cornell
Current Problems
Tunisia and Egypt Bahrain and Yemen In Libya, Qaddafi Forces attack
Rebels in strategic refinery town The Libyan Emirates Oil Refining Co.
has shut down one of the largest crude refineries in the area; nearby terminals bombed
Supply shock continues
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Impact on the Markets
Supply uncertainty causing price fluctuations
OPEC to compensate for lost Libyan production
Rising oil prices will weigh on markets; global growth
Non MENA oil companies Increased demand for fuel efficiency?
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What to Look For
Aid to rebels in Libya; relatively quick end to stalemate (thanks Patel)
Saudi “Day of Rage” Are we better prepared?
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ADM Background
Consumer, non-cyclical Vertically integrated
Procures, transports, stores, processes, and merchandises agricultural commodities and products oilseeds, corn, wheat, cocoa, and other agricultural
commodities Manufactures vegetable oil and protein meal, corn
sweeteners, flour, biodiesel, ethanol, and other food and feed ingredients
Oilseeds Processing: 43%Corn Processing: 13%Agricultural Services: 36%Other: 8%
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Management
CEO: Patricia Woertz President and CEO since April 2006, Chairman
of the Board of Directors since February 2007 Previously Executive VP of Chevron Corporation
and Director of Proctor and Gamble. Currently on the board of directors of P&G,
serves on the international business council of the world economic forum, and VP chairman of The Business Council. Appointed to the president’s export council.
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Operations Breakdown
Oilseeds Process-ing 43%
Corn processing 13%
Agricultural Services 36%
Other 8%
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Favorable Macroeconomic Trends Emerging Market Middle Class will lead
to higher demand for wheat, corn as both food and livestock feed (higher demand for proteins)
Rise in Oil Prices with continuing Middle East instability will help alternative energy cost effectiveness including biofuels
Current Federal Reserve policy will eventually lead to inflation and this raises ADM profit margins without major impact on demand
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Russian Export Ban
Russia is third largest wheat exporter Bad weather destroyed 20% of wheat crop Lead to temporary ban on grain exports Forecasters don’t see better weather in the
coming months
Other wheat supply constraints caused by flooding in Canada and China
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Russian Floods and Supply Shocks
Not affected by Canada floods, Russian harvest, etc.
The Company is engaged in milling wheat, corn, and milo into flour in the United States, Canada, the Caribbean, and the United Kingdom.
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USDA Production Forecast
U.S. corn harvest forecast slashed USDA announcement on Oct. 26 declared supply
even weaker than initially indicated wheat, corn, and soybean prices affected
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QE2 and Inflation
Federal Reserve have been executing a $600 billion stimulus that will end in June 2011
Fed purchasing bank assets and government bonds
Two effects Weaker dollar raises commodity prices (inflation) Money leaves low-yielding treasury market into other
assets
Mutual Investment Club of Cornell
Favorable Macroeconomic Trends Emerging Market Middle Class will lead
to higher demand for wheat, corn as both food and livestock feed (higher demand for proteins)
Rise in Oil Prices with continuing Middle East instability will help alternative energy cost effectiveness including biofuels
Current Federal Reserve policy will eventually lead to inflation and this raises ADM profit margins without major impact on demand
Mutual Investment Club of Cornell
Other Supply and Demand Factors
- Depreciation of the Yuan could hurt ADM export. However, critics claim Yuan is in fact undervalued
- Improved weather conditions in competing economies. Argentina soybean crop being planted at a quicker pace as farmers take advantage of rains in September and October.
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Federal Gov. Subsidies
• Agricultural industry receives wide range of government aid through subsidies, tariffs, and tax breaks
• Tax breaks for ethanol-blended gasoline end this year
• Some in Congress want to end tax cut– Would lead to higher food prices
• Obama Administration announces backing of indefinite extension of tax cuts
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China
• China is largest soybean consumer in the world
- Chinese import U.S. Soybeans, which are relatively cheap, to sell into domestic market at higher prices - Should last as long as U.S. supplies are cheaper
• Demand from China is stronger than ever
• Demand will continue to grow as economy expands
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China
Prosperity in developing world – more demand for agriculture intensive food
Demand driven by emerging economics, China in particular, behind ADM growth
ADM, unlike Bunge, has developed immense soybean crushing capacity in China, one of the world’s largest markets for soybean oils. It has acquired facilities in the 10 best Chinese ports.
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Livestock Feed Livestock feed is a large demand factor for for corn and wheat As world economies recover and grow, demand increases for meat
products With higher GDP follows rising incomes and boosted demand for
meat and fuels. A growing livestock industry will need increasing supplies of feed grains.
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Favorable EPA Rulings
EPA approved E15 gasoline for 2007+ model light vehicles Only 20% of vehicles
December EPA ruling based on 2001 – 2006 model vehicles 70% of vehicles on US roads
$20,000 installation costs Currently, corn for biofuels accounts for a third of
total corn volume.
Mutual Investment Club of Cornell
EPA Ruling
EPA ruling drastically affects corn demand
0%
10%
20%
30%
40%
50%
60%
70%
80%
Percentage of U.S. Cars Affected
2007+ 2001-2006
Mutual Investment Club of Cornell
Effect of Higher Commodity Prices
Previous quarter conference call: 90% of the increase (in net sales and profits) was
attributable to increases in selling prices, primarily resulting from the significant increase in underlying commodity costs. The remaining 10% of the increase in sales revenue was due to higher sales volumes
This is important because it signals higher selling prices are sticking and not hurting demand.
Mutual Investment Club of Cornell
From Capital Expenditures to ROE
ADM prefers to large capital expenditures and company growth over stock buyback
Have completed a series of large investments and still have a series of other capital expenditures over the next few months Plants and factories in Europe and Asia
Possibly looking at share buyback Will result in share price appreciation
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Possible M&A
“We have our ongoing CapEx program that's got a little more than a year to kind of run out… and we see some good M&A opportunities out there that we're evaluating each and every day.” Potential buyout of Brazilian company
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Other Opportunities
Brazil’s elimination of 20% ethanol tariff until Dec. 31, 2011
Agricultural industry’s strong lobbying power Could push legal ethanol requirements even further
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Expansion (2009-2010)
Past five years, the Company has experienced significant growth- $6.7 billion for construction of new plants and the acquisitions of plants and transportation equipment
Constructing two dry corn milling plants which will increase the Company’s annual ethanol production capacity by 550 million gallons to 1.7 billion gallons
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Research & Development
“We are working to provide customers with palm oil sourced from crops that are responsibly grown and harvested.” – Commitment to Sustainable Oil Production (ADM Publication, 2009).
Thanks to this exceptional utility and to its relatively high oil yield, world palm oil production more than tripled between 1990 and 2005. Palm oil now constitutes approximately one-third of the roughly 130 million total
tons of the eight major vegetable oils and fats consumed worldwide every year
Mutual Investment Club of Cornell
Research & Development
ADM Research Finds Corn Stover Can Be Effective in Cattle Feed With Simple On-Farm Treatment Corn Stover: Corn stover consists of the leaves and stalks of maize plants left in a
field after harvest and consists of the residue: stalk; the leaf, husk, and cob remaining in the field following the harvest of cereal grain.
Mike Baroni, VP of Economic Policy for ADM and Dr. Mike Cecava, both state that:
“Global agriculture needs to produce more using less water, fertilizer and other inputs, and without bringing vast amounts of new land into production. Using crop residues and co-products, rather than higher-value grains, to help feed animals could enable the world to make more of the global harvest and help agriculture expand to meet all needs.”
Mutual Investment Club of Cornell
ADM in the News Friday, March 4 – Burcon NutraScience Corporation announced that the Company has amended the
license and development agreement between Burcon, Burcon NutraScience (MB) Corp., and Archer Daniels Midland Company (ADM) to provide an extended development period for continued research aimed at expanding the commercial value of Puratein® and Supertein™. Burcon and ADM have agreed to an amendment of the license and development agreement to effectively provide a one-year extension to March 1, 2012, to facilitate continued research. Burcon's main research objective during the one-year term of this amendment is to further the
commercialization potential of Burcon’s canola protein products Puratein® and Supertein™, particularly with respect to their unique functional and nutritional characteristics.
Thursday, March 3 – Archer Daniels Midland Company was ranked the world’s most admired company in the food production industry for the third consecutive year by Fortune. Fortune ranked ADM at the top spot in the food production industry in six of the nine categories by which companies were evaluated: people management, social responsibility, quality of management, financial soundness, quality of products, and global competitiveness.
Mutual Investment Club of Cornell
ADM in the News Wednesday, March 2 – Rising Oil Boosts The Fortunes Of Biofuel Stocks: On a historical basis,
alternative fuels come into the spotlight when oil prices surge and analysts and economists speculate that rising prices at the pump could crimp economic activity. That seems to be the case now as investors seem to be favoring ethanol and biofuel stocks. Most Index members have market values of less than $300 million, but Archer-Daniels Midland has more and is by far the largest Index constituent and is doing quite well as oil prices soar.
Wednesday, February 9 – ADM to Invest in Sustainable Palm Production in Brazil. Project will diversify ADMs product portfolio and support family farms. Spanning five years, the ADM investment will encompass approximately 12,000 hectares of palm production in the state of Pará and include the construction of a palm processing plant. This investment adds a new crop to their value chain in Brazil and diversifies their feedstock options for biodiesel production there, while at the same time supporting commitment to sustainability in terms of both agricultural production and the livelihoods of farm families in Brazil.
Tuesday, January 4 – Archer Daniels Midland Company announced that it has acquired all of the outstanding capital stock of Alimenta (USA), Inc., from Alimenta S.A., an international trading company based in Geneva, Switzerland. Alimenta (USA) is ADM's 50% partner in Golden Peanut Company, LLC. As a result of this transaction, ADM now controls 100% of Golden Peanut Company. The Company’s operations include seven handling facilities located in peanut-producing regions of the United States and one facility in Argentina.
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Marketing & Culture
5-year plan announced in February to invest in nearly 30,000 acres of palm trees in Brazil and build a new processing plant. Part of a long-term program to use palm in its biodiesel production Focus on palm oil is a new strategy that ADM began in 2007 Less focus on Soybean Processing ADM has teamed with the not-for-profit organization ‘Business for Social
Responsibility’ to undertake an analysis of their palm supply chain, and to determine how they can meet their customers’ desire for sustainably-sourced products
Fortune ranked ADM at the top spot in the food production industry in: People Management Social Responsibility Quality of Management Financial Soundness Quality of Products Global Competitiveness
Mutual Investment Club of Cornell
Competitors
Top competitors include: Bunge Ltd. (BG) Largest producer of soybean oil Large in Biofuels, especially Brazilian sugar-cane ethanol
Cargill (Private) An international producer and marketer of food, agricultural, financial
and industrial products and services.
Corn Products Intl (CPO) largest corn refiners major supplier of high-quality food ingredients
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P/E (Avg. Earnings for 5 years Dec06-Dec10)
ADM 13
BG 10
CPO 22
RoA (Avg. Income for 5 years)
ADM 5.64%
BG 1.03%
CPO 3.27%
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Efficiency
ADM ranks first in agricultural industry with highest level of efficiency
Company RPE (Rev. per Employee)
ADM $2.19 mil.
Bunge $1.66 mil.
Alico $0.49 mil.
Corn Products Int’l $0.48 mil.
AgFeed $0.36 mil.
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Why ADM?
Vertically Integrated ADM controls the entire supply chain from growing
the crops to storing, cleaning, and transport agricultural commodities
Global Positioning Equity and partnerships across Asia and Europe Factories and property in Europe and Asia
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Other Competitive Advantages Source and Availability of Raw Materials Patents, Trademarks, and Licenses Seasonality, Working Capital Needs,
and Significant Customers
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SWOT Analysis Strengths
Balance sheet Vertically Integrated (control own supply chain) Stability and efficiency Capital Structure Global Operations Growing dividends
Weaknesses Dependence on subsidy
Opportunities Buyouts while other companies are still priced low Take advantage of high commodity prices over coming months Brazil’s tariff elimination
Threats Expiration of tax break
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Inventories, Derivative Instruments & Hedging Activities
hedged portions of its anticipated monthly purchases of natural gas over the next 12 months, ranging from 37% to 58% of its anticipated monthly natural gas purchases.
hedge some portion of the forecasted foreign currency expenditures and/or receipts
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Risks
Commodity Price Risk Significant competition in the markets
in which it operates Fluctuations in energy prices could
adversely affect the Company’s operating results.
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ADM has beat earnings estimates in three of previous four quarters
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Great Balance Sheet• Balance sheet is a strength; has put ADM in strong
position financially• With commodity prices rising, liquidity needs are more
important for margin calls, but ADM said that its current
• Quick Ratio – measures short-term liquidity• Current Ratio – measures ability to pay off short-term
obligations
• ADM may continue to repurchase shares so long as it remains within it’s “A” credit rating
• Specifically, ADM noted that it is not feeling any liquidity squeeze.
Mutual Investment Club of Cornell
Capital Structure
• ADM has highest Debt-Equity Ratio in the agricultural products industry
• Being highly levered allows them to take advantage of today’s high prices– Bonds are investment gradeCompany Debt/
EquityDebt/Assets
ROE ROI
ADM 0.52x 23.93 13.67 8.41
Corn Products
Int’l0.34x 18.43
Bunge Limited
0.39x 17.92
Industry - - 11.10 4.75
Sector - - 13.34 7.36
Mutual Investment Club of Cornell
Relative Pricing
• ADM has historically traded at 14 to 16 times earnings
• ADM priced relatively cheap compared to competitors
Company P/E Beta
ADM 12.21 .24
Corn Products Int’l 22.12 1.19
Bunge Limited 4.88 1.18
Industry 20.32 -
Sector 16.66 -
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Relative Pricing
ADM priced relatively cheap compared to industry average
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Steady Dividends
Current Yield: 0.16, 1.73% 36 years of increasing dividends
Commodity Price Risk
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Valuation
EPS = 3.03 10% Growth rate for three years 4.5% perpetual EPS growth rate Benchmark return of 11%
Value per share = $41.20 Current trading price $36.95
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Investment Proposal
37 shares X $36.60 per share = $5,014.20
Investment Horizon: 2-3 years Long term Position with a review after 6
months
Mutual Investment Club of Cornell
Investment Thesis Summary Favorable Macroeconomic Trends
associated with growing growing emerging market middle class (Long term demand increase)
Competitive advantage in industry through vertical integration, strong global presence and superior operating efficiency
Undervalued due to market volatility which discounts strong earnings, brand strength and strong positive industry potential
Continued outperformance should catalyze value appreciation over the next year and beyond