Why Archer Daniels Midland's Stock Is Fairly Valued, According To JPMorgan

Due to the elevated risk of disruption to U.S. agricultural trade, JPMorgan analysts said Archer Daniels Midland Co (NYSE: ADM) has an even risk-reward profile as the food producer’s July 31 second-quarter earnings report approaches.

The Analyst

JPMorgan's Ann Duignan on Monday upgraded Archer Daniels Midland from Underweight to Neutral and raised the price target from $42 to $48.

The Thesis

Trade disruptions, particularly with China, Canada and Mexico, have both positive and negative ramifications for Archer Daniels Midland, Duignan said in a note.

The analyst outlined her rationale for why the agricultural stock’s valuation is balanced:

• Ethanol production volumes were up 4 percent year-over-year. The Trump administration plans to include more ethanol exports in new trade deals.
• U.S. soybean crush volumes increased 13 percent year-over-year. JPMorgan consider these margins to be as good as it gets; Duignan said the U.S. will likely maximize soybean crush capacity while the strong margins are in place.
• U.S. export volumes of both corn and soybeans significantly increased in Q2.
• China’s new tariff on U.S. soybeans could have a significant bearing on trade flows later in 2018, Duignan said. China may also become more reliant on these particular crops from sources in the southern hemisphere until the U.S. harvests its new crop, the analyst said.
• A trucker strike in Brazil has affected crush and origination activity, according to JPMorgan.

While these factors may hurt U.S. exporters in the long run, the disruption offers significant margin opportunities in the near term, according to JPMorgan.

Price Action

Archer Daniels Midland shares were trading up another 1 percent Tuesday to $47.76.

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