Archer-Daniels-Midland Company (NYSE:ADM) shares are up more than 1.20% this year and recently increased 1.63% or $0.65 to settle at $40.56. Bunge Limited (NYSE:BG), on the other hand, is up 5.01% year to date as of 01/10/2018. It currently trades at $70.44 and has returned -0.04% during the past week.
Archer-Daniels-Midland Company (NYSE:ADM) and Bunge Limited (NYSE:BG) are the two most active stocks in the Farm Products industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect ADM to grow earnings at a -2.50% annual rate over the next 5 years. Comparatively, BG is expected to grow at a 10.10% annual rate. All else equal, BG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 3.05% for Bunge Limited (BG). ADM’s ROI is 4.40% while BG has a ROI of 7.40%. The interpretation is that BG’s business generates a higher return on investment than ADM’s.
The value of a stock is simply the present value of its future free cash flows. ADM’s free cash flow (“FCF”) per share for the trailing twelve months was +0.73. Comparatively, BG’s free cash flow per share was +0.76. On a percent-of-sales basis, ADM’s free cash flow was 0.65% while BG converted 0.25% of its revenues into cash flow. This means that, for a given level of sales, ADM is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. ADM has a current ratio of 1.60 compared to 1.60 for BG. This means that ADM can more easily cover its most immediate liabilities over the next twelve months. ADM’s debt-to-equity ratio is 0.42 versus a D/E of 0.86 for BG. BG is therefore the more solvent of the two companies, and has lower financial risk.
ADM trades at a forward P/E of 14.96, a P/B of 1.31, and a P/S of 0.37, compared to a forward P/E of 15.00, a P/B of 1.44, and a P/S of 0.22 for BG. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. ADM is currently priced at a -0.76% to its one-year price target of 40.87. Comparatively, BG is -13.04% relative to its price target of 81.00. This suggests that BG is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.10 for ADM and 2.50 for BG, which implies that analysts are more bullish on the outlook for ADM.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. ADM has a beta of 1.09 and BG’s beta is 1.01. BG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. ADM has a short ratio of 3.81 compared to a short interest of 2.20 for BG. This implies that the market is currently less bearish on the outlook for BG.
Bunge Limited (NYSE:BG) beats Archer-Daniels-Midland Company (NYSE:ADM) on a total of 8 of the 14 factors compared between the two stocks. BG is more profitable, generates a higher return on investment and has higher cash flow per share. BG is more undervalued relative to its price target. Finally, BG has better sentiment signals based on short interest.