Buying Archer Daniels Midland (ADM)

I bought ADM yesterday afternoon. I think Archer Daniels Midland is a great company with tremendous potential for future growth. ADM has come to be viewed by the market as an ethanol and biodiesel stock, and they are in fact the world’s largest ethanol producer, but biofuels are just a sideline to their main business of crushing soybeans and corn to manufacture food products. ADM is a strong company with a solid leadership position in the highly profitable business of processing soybeans, corn, wheat, and cocoa. It is hard to find commercially prepared food or beverages which do not contain ingredients manufactured by ADM. Although the stock’s current dividend yield is only 1.14%, this company has paid dividends for 75 years, they have increased the dividend every year for more than 25 years, and the payout ratio is only 17%. The stock is quite cheap for a blue chip with excellent prospects. It has a price-earnings ratio of 15, a price to cash flow ratio of 10, and a price to book value ratio of 2. The company’s net income has tripled over the last five years. At the height of the alternate energy mania last spring, Archer Daniels Midland stock sold as high as 46.36 on hope that they would be able to make money selling ethanol and biodiesel some day. But the stock has collapsed as oil prices have fallen and corn prices have soared, reducing the likelihood that anyone will be able to profit from ethanol produced from corn. However, last week the company announced that it has indeed started to make money selling ethanol. Yesterday afternoon I was able to buy ADM at a 25% discount to last May’s price. There is a good chance that this will go against me in the short term. But taking a longer view, I believe this investment will produce an average annual total return in excess of 10% from ADM’s food processing business alone. And in the event that the U.S. government subsidizes the production of biofuels, a reasonably good possibility, ADM’s profits and stock price should soar.

Zions Bancorp. (ZION)

I found this company while running screens for cheap stocks. Zions stock does look cheap. The P/E ratio is 15.9, the P/B ratio is 1.9 , and the stock appears to be selling at a significant discount to its intrinsic value. ZION operates over 500 banking offices through seven subidiairies in ten Western states: Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Utah, Texas, and Washington, and also engages in money management, insurance sales and other financial businesses through ten other subsidiaries. The firm has a market capitalization of 9.1B. Zions has outperformed the S&P, but with less volatility. But the current dividend yield is only 1.82%. However, the dividend does show an excellent 5-year growth rate and the payout ratio is only 27%. A glance at the balance sheet shows a current ratio of 1.11, within the range of many banks. But it is proving difficult to obtain enough information to assess this company’s financial strength in any detail, and the current ratio by itself certainly does nothing to inspire confidence. Earnings and the rate of earnings growth have been quite good. However, company insiders have been selling more stock than they have been buying, and ZION has a surpirisingly high .94 3-year correlation with the energy sector. ZION is no doubt a fine company but I see too many things I don’t like.

The Chubb Corp. (CB)

The Chubb Co. is a profitable property and casualty insurance operation. CB has outperformed the S&P for many years, but with less volatility (beta .91). Although the current dividend yield of 1.89% is a bit light, dividend growth has been quite satisfactory – Chubb has raised the dividend annually for at least 25 years – and the payout ratio is modest. CB’s annual total return potential appears close to 12%. This stock looks quite cheap by conventional valuation standards. The P/E ratio and P/CF ratio are both below 9. The company is financially sound and has relatively little long-term debt. There have been good years and lean years, but Chubb consistently makes a lot of money. In most of the last ten years Chubb’s premium income has exceeded casualty losses by a hefty margin. The stock is in a nice uptrend and does not appear to be overbought. I am interested in buying Chubb, but surprisingly, I see it has a higher 3-year correlation to the energy and utilities sectors than it does to the financial sector. This may indicate vulnerability if energy prices weaken or if interest rates continue rising, so I plan to wait for a modest pullback.