Call it a safety investment or a recession-resistant stock if you’d like, but Archer Daniels Midland (NYSE:ADM) stock was anything but safe on Monday. Dropping 24% for the day, ADM stock had its worst single-session performance in a very long time.
Chicago-based Archer Daniels Midland produces and sells basic agricultural commodities such as seeds and oils. If you live in the U.S. and don’t grow all of your own food, there’s nearly a 100% chance that Archer Daniels Midland contributes to your diet in some way.
Yet, some investors probably lost their lunch on Monday when ADM stock crashed to its lowest price since January 2021. That’s highly unusual for this particular stock, so it’s worth investigating the value-investing possibilities here, if there are any.
No probe is a good probe
Generally speaking, it’s not a good thing when the Securities and Exchange Commission (SEC) requests information or anything else from a business. After all, being on the radar of regulators can be the first step along a prolonged, costly journey.
Thus, it’s not too surprising that ADM stock sold off after word got out about an investigation of the company following a voluntary document request from the SEC. To understand what’s going on here, it’s necessary to backtrack to 2014.
That’s when Archer Daniels Midland acquired Wild Flavors, a European natural ingredient maker, for $3 billion. It was part of an effort to boost Archer Daniels Midland’s nutrition business.
Apparently, the company’s nutrition unit isn’t doing well today. According to Bloomberg, the operating income of this business division is projected to have declined by more than 18% last year.
Fast-forward to Jan. 22, 2023, when Archer Daniels Midland dropped a bombshell by announcing that it was placing Chief Financial Officer Vikram Luther on administrative leave. Furthermore, outside counsel for the company is investigating it and the audit committee of its board “regarding certain accounting practices and procedures with respect to ADM’s Nutrition reporting segment,” according to a statement from Archer Daniels Midland.
Moreover, the probe is focused on what Archer Daniels Midland described as “intersegment transactions” involving its nutrition unit. Again, it should be emphasized that this investigation is being conducted by outside counsel for Archer Daniels Midland — not by the SEC.
Ismael Roig will fill in for Luther on an interim basis, but this certainly isn’t quelling the concerns of jittery investors. Adding to the sense of uncertainty, Archer Daniels Midland is delaying the filing of its fourth-quarter earnings results and its annual report for 2023.
Just relax and reassess
The market hates uncertainty, so it makes sense that ADM stock fell on the news of Archer Daniels Midland pushing back its financial reports. Stock traders are also probably concerned about the possibility of regulators alleging that Archer Daniels Midland committed some form of accounting fraud.
Not everyone is panicking in the wake of these developments, however. For example, BMO Capital Markets analyst Andrew Strelzik seems to expect the sense of uncertainty to clear up at some point.
“We would expect ADM to reassess strategic priorities within Nutrition as the new profitability run-rate becomes more clear,” Strelzik assured investors.
Importantly, Archer Daniels Midland’s nutrition business isn’t its bread and butter. In October, the company expected to report more than $7 per share in full-year adjusted earnings for 2023; now, the company’s forecast is for adjusted earnings of $6.90 per share.
That’s unfortunate but not necessarily calamitous. Meanwhile, after a 24% haircut, ADM stock should look attractive to value seekers who don’t mind traveling wherever they see blood in the streets.
For what it’s worth, Archer Daniels Midland evidently intends to play ball with regulators. The company is reportedly cooperating with the SEC, and replacing the CFO shows that Archer Daniels Midland’s management is at least being proactive on some level.
Meanwhile, unless unexpected data points are disclosed, Archer Daniels Midland’s trailing price-to-earnings (P/E) ratio should increase after this steep share-price decline. The company’s forward annual dividend yield should increase as well.
Thus, I’m actually not against the idea of scaling slowly into a stock position in Archer Daniels Midland. Just be patient with your investment, as ADM shares are like seeds that might not yield crops for a while.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.