Archer Daniels Midland rates a `buy,' based on strong profit outlook

Your Money

December 24, 2006|By Andrew Leckey | Andrew Leckey,Tribune Media Services

I have heard Archer Daniels Midland Co. mentioned as a good play on ethanol. What does this stock look like now?

- R.C., via the Internet

It is a company fueled by fuel.

As the largest U.S. producer of ethanol, representing nearly one-third of the industry's output, it has gained powerful momentum from the corn-derived fuel's popularity.

It seems destined for continued dominance in that field as it expands capacity to pursue opportunities as a gasoline additive and in the production of biodiesel fuel to reduce global warming.

In keeping with energy as a long-term priority, former Chevron Corp. official Patricia Woertz was hired as chief executive this year. Woertz recently said of the firm's prospects: "ADM is in a category of one to capitalize on the exceptional opportunity ahead."

Democratic gains in Congress seem to bode well for the prospects of alternative energy sources.

The question, however, is whether gains can continue unabated if corn prices rise, oil prices decline and available quantities of ethanol increase sharply. Being in a commodity business translates into price fluctuations, government issues, political risks, derivatives strategizing and hedging that inject uncertainty into projections.

Stock of Archer Daniels Midland (ADM) is up 32 percent this year, after gains of 10 percent last year, 47 percent in 2004 and 23 percent in 2003. Earnings have been propelled by its thriving ethanol, oilseed and corn-processing businesses.

ADM is the world's largest corn processor and one of the largest processors of oilseeds. It processes cereal grains and other plants into products used by food manufacturers and livestock producers. Vast operations extend into Europe and emerging markets in South America and China, while it also has a large network of storage and transportation facilities.

Growing demand for new products that reduce or eliminate trans fats works in ADM's favor. It also predicts that global demand for food will more than double by 2050, playing to its other obvious strengths.

According to Thomson Financial, the consensus Wall Street rating of shares of ADM is a "buy," consisting of two "strong buys," three "buys," two "holds" and one "underperform."

Earnings are expected to increase 27 percent in its fiscal year ending in June, compared with a 3 percent gain projected for the major diversified food industry. Next fiscal year's expected 11 percent increase is in line with its peers. The forecast for a five-year annualized return of 9 percent matches the forecast industrywide.

I have never owned stocks before. Would it make sense for me to only own stock index funds?

- R.L., via the Internet

It all depends on how much excitement you'll want in your investing.

An index fund is a portfolio representing a particular market or market segment. It is a low-cost vehicle whose managers attempt to track the selected index as closely as possible.

A popular example is Standard & Poor's index of 500 widely held companies chosen by market size, liquidity and industry. But many other index funds have sprung up that use a variety of innovative benchmarks often constructed by the investment firms offering them.

yourmoney@tribune.com

Andrew Leckey writes for Tribune Media Services.

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