Archer-Daniels-Midland Looks Pricey After Recent Share Run-Up

Archer-Daniels-Midland (NYSE:ADM), the Chicago-based agricultural commodities giant has performed very well over the past year, as global inflation surged.

Shares in the firm have returned a total of consensus outlook is calculated using the views of 15 analysts and is consistent with E-Trade’s results. The consensus rating is bullish and the consensus 12-month price target is 20.4% below the current share price.

Source: Investing.com

The Wall Street consensus outlook makes sense in light of the huge share price gains in recent months. Having the current share price so far above the consensus price targets definitely suggests caution.

Market-Implied Outlook for ADM/h2

I have calculated the market-implied outlook for ADM for the 9.1-month period from now until Jan. 20, 2023, using options that expire on this date.

The standard presentation of the market-implied outlook is a probability distribution of price return, with probability on the vertical axis and return on the horizontal.

Source: Author’s calculations using options quotes from E-Trade

The market-implied outlook for the next 9.1 months is tilted to favor negative returns, with the peak in probability corresponding to a price return of -4.9%. The expected volatility calculated from this outlook is 30% (annualized).

To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below).

Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.

This view shows that the probabilities of having a negative price return over the next 9.1 months are consistently higher than the probabilities of a positive return of the same magnitude, across a wide range of the most probable outcomes (the dashed red line is above the solid blue line over the left half of the chart above). The market-implied outlook appears somewhat bearish.

Theory suggests that the market-implied outlook is expected to have a negative bias because risk-averse investors pay more than fair value for downside protection (e.g. put options). There is no way to measure if such a bias exists, however. Considering that a negative bias is expected, however, leads me to interpret this market-implied outlook as neutral with a bearish tilt rather than moderately bearish.

The market-implied outlook is more bearish than in my analysis from October. I also calculated the market-implied outlook over the 2 months until June 17, 2022 and the results were qualitatively similar so I did not include the chart here.

Summary/h2

Archer-Daniels-Midland has delivered strong earnings in the inflationary environment of the last 12+ months and investors have bid up the share price in response. As a result, at current levels, some degree of irrational bullishness is apparent.

The Wall Street consensus rating continues to be bullish, but the share price is around 20% above the 12-month price target. The market-implied outlook to early 2023 is neutral with a bearish tilt. The expected volatility, 30%, is higher than in my previous analysis (25%-26%), and the current market-implied outlook is less favorable than it was back in October.

While ADM is well-positioned to continue to thrive, with high fuel and food prices in the United States and beyond, I am changing my rating from bullish to neutral because the shares have so much anticipated earnings upside reflected in the current price.