Archer-Daniels-Midland Company (NYSE:ADM) shares are down more than -10.54% this year and recently increased 0.32% or $0.13 to settle at $40.97. Bunge Limited (NYSE:BG), on the other hand, is down -8.55% year to date as of 12/05/2017. It currently trades at $68.05 and has returned 0.93% 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. 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 isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure 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.
Earnings don’t always accurately reflect the amount of cash that a company brings in. 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 are important because they reveal the financial health of a company. 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 14.93, a P/B of 1.32, and a P/S of 0.37, compared to a forward P/E of 13.63, a P/B of 1.35, and a P/S of 0.20 for BG. ADM is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. ADM is currently priced at a 0.91% to its one-year price target of 40.60. Comparatively, BG is -14.51% relative to its price target of 79.60. 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
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. ADM has a beta of 1.09 and BG’s beta is 1.06. BG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. ADM has a short ratio of 4.26 compared to a short interest of 2.17 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 9 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. In terms of valuation, BG is the cheaper of the two stocks on an earnings and sales basis, BG is more undervalued relative to its price target. Finally, BG has better sentiment signals based on short interest.