Archer-Daniels-Midland (ADM) and Alternative Energy
02-21-07: With the Democrats now in control of Congress, should we now expect to see some movements on the alternative energy front? This is a common question we have received. While politics can play a role, we believed it is ultimately the company themselves that controls their destiny. Despite the perception that the Democrats are more environmental friendly, the reality is if big oil were to disappear, these same politicians would be concern over jobs and the taxes these companies generate. Short answer; we would not place our hope on any favorable governmental policies to move any securities. However, since alternative energy is now in focus, let’s take a look at Archer-Daniels-Midland (ADM) as they are currently the largest ethanol producer in the U.S. today.
ADM stock was pretty much flat until the price of oil traded over $65 per barrel and gasoline topped $3 per gallon in the summer of 2006. This caused the nation to debate on the future sources of energy and another means to power our homes, cars and etc. All of the sudden, alternative energy became a buzz word for politicians, CEO and the media.
The buzz drove the stock prices of companies that were seen as potential provider of alternative energy. ADM benefited from this renewed interest because the company is the largest ethanol producer in the United States.
As oil prices have declined to a "manageable" level, the alternative energy debate has been left on the back burner (for now). As a result, the lack of hype has caused ADM and other alternative energy company’s shares to decline. To be fair to ADM, not all of its appreciation was the result of hype, the company did report a solid revenue and profit. Despite the solid revenue growth, it was below what Wall St. was expecting. This is not unusual when analysts overestimate.
The question today is, trading at $35 per share, is it time to buy ADM? Our take on the current situation is NO. We would not buy the stock at this level. Even though the stock has been discounted, we believed it is still expensive and the risk of further decline is high. However, this does not necessarily mean this is not a good company to invest for the long term. Long term, this is a great company with solid fundamentals and plenty of cash. Our main concern is the stock has become a poster child for alternative energy; as a result, speculators are heavily invested in this company.
Our entry price for ADM would be in the low 30s or sub 30s. It might never get this low and some would probably laugh at our view, but heck, it is our hard earned money that we are risking so why not take a conservative approach when it comes to a stock that has received so much hype.
