ADM being a buyer IMO would create FTC problem due to its market share and size.
Archer May Find Takeover Targets In Ethanol Glut
Andrew Farrell, 07.02.07, 5:20 PM ET
Booming ethanol output has pressured shares of producers in recent months as investors fret about a glut. On Monday, Archer Daniels Midland traded higher on hopes it might benefit from such conditions.
Shares of Archer Daniels Midland (nyse: ADM - news - people ) closed up $1.12, or 3.4%, at $34.21, after Bank of America (nyse: BAC - news - people ) analyst Edgar Roesch upgraded the company to "buy" from "neutral." Roesch explained that slipping ethanol prices could create cheap acquisition targets for Archer.
Archer Daniels Midland shares have lost 9.8% over the past three months, partly on concerns that an ethanol surplus is coming. With high oil prices and rich U.S. government subsidies, producers have rushed to ramp up production of the fuel. (See: "Ethanol Output Hits Record Levels") Roesch estimates that the increased production will push down Archer's margins on ethanol from 70 cents per gallon to 35 cents.
However, Archer is better poised to weather the tough conditions than some of its competitors. For one, it's more diversified than most other producers.
According to Roesch, the market for grains and seed processing is swelling because of global growth in biofuels and higher demand for protein in emerging markets. This benefits the company because it has a range of assets capable of storing and transporting its products to far-flung places, he said.
Unlike such pure-play ethanol companies as VeraSun Energy (nyse: VSE - news - people ) and BioFuel Energy (nasdaq: BIOF - news - people ), Archer processes corn for syrup, starch, and high-fructose sweeteners in addition to ethanol. It also operates oilseed and agricultural services divisions. Archer does not break out how much of its sales come just from ethanol.
Archer can also handle lower prices because it produces ethanol more cheaply than competitors. "As a low-cost producer, Archer will weather storms better than competitors and could buy assets inexpensively if ethanol fundamentals turn negative as we expect," Roesch said.
Archer looks ready to benefit from a huge corn crop. Last week, the Agriculture Department reported that farmers planed 19% more corn in 2007 than the previous year. (See: "Corn Is King In the U.S.")
"This could significantly lower Archer Daniels Midland’s input costs for ethanol versus its competitors and also provide some benefit on sweeteners," said Roesch, who maintained a $40.00 price target on the company.
The company, located in Decatur, Ill., was founded in 1902 by George Archer and John Daniels as the Archer-Daniels Linseed Company. It became Archer Daniels Midland in 1923 when it acquired the Midland Linseed Products Company.
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