Tuesday, June 08, 2010

Standard Snipping

This is a small cap weblog but get to rub elbows with the bug guys on occasion. This occasion is a follow up on Archer Daniels Midland (ADM: NSYE) and its receipt of a Department of Energy grant to development biofuel. ADM was awarded $24.8 million to match its own investment of $10.9 million in a project to produce ethanol and ethyl acrylate using acids to breakdown biomass as part of a pretreatment step. The compound ethyl acrylate is used in the production of plastics, adhesives and coatings among other materials.

They are busy at ADM and have not returned our calls. We cannot say for certain if the Obama administration is achieving its goal of energy independence or even the short-term goal of putting people back to work. The Company has been uncharacteristically quiet about its renewable fuels efforts. Typically the good folks - there are 28,000 employees - at ADM are quick to sing their own praises.

That is ADM was quiet until yesterday, June 7, 2010 when management sent a letter to the U.S. Environmental Protection Agency - and subsequently issued a press release with the contents - asking that the EPA pass a new standard for ethanol-gasoline blends containing up to just 12% ethanol (E12) for all cars. This would be an alternative to the E15 or 15% (E15) blending standard that is to go into effect this summer.

ADM wants the EPA to waive compliance with the upcoming standard until U.S. car owners get back on the road and start driving. You see when people are out of work and have to prioritize their spending they tend to prefer consuming their corn as a muffin as opposed to burning it up in the gas tank for a trip to the mall. This is a problem for ADM that has been making a pretty penny turning their corn into ethanol.

Stayed tuned to find out if the EPA acquiesces and snips off the E15 standard. We also pledge to follow-up on ADM’s ethyl acrylate project. With the recent market pullback, shares of ADM are trading at 8.9 times forward earnings and offer a dividend yield of 2.3%. If you have a tolerance for large cap exposure and have confidence in ADM management to run the company with a modicrum of integrity (a factor that has been questioned in the past), the yield could be a compelling reason to take a position in this major player in the agriculture/food/renewable chemical complex.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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