Archer Daniels' Pain May Be Investors' Gain

Business is solid, despite legal problems sinking the stock

Long-suffering shareholders of Archer-Daniels-Midland Co., having endured embarrassing revelations of alleged corporate misconduct, are bracing for another trip to the woodshed. In September, the U.S. Justice Dept. expects to bring price-fixing charges involving the animal-feed ingredient lysine against ADM and two key executives. A month later, the grain and oilseed processor is likely to unveil weak earnings due to steep commodity prices. And on Oct. 17, reform activistists are poised to vent complaints about corporate governance at ADM's annual meeting.

It's enough to make most investors run for cover. Although neither the company nor its executives has been charged with wrongdoing, the perception remains that ADM has a crooked streak. The stock badly lags the indexes (chart). ADM's basic businesses, though, remain sound. And ongoing corporate governance reforms spurred by the probe could strengthen the company further. If ADM stock gets beaten down more, it could become a compelling buy for value-minded investors.

HEAVYWEIGHT OUTSIDERS. The Decatur (Ill.) company is well-positioned to take advantage of soaring global demand for basic foodstuffs. As diets improve in developing nations, the market is booming for ADM animal feed and cooking oil. While strong demand will contribute to higher grain and soybean prices--a negative for margins--the asset-rich company can more than compensate by expanding its business and leveraging its status as a low-cost producer.

As for the price-fixing investigation of lysine, as well as citric acid and high-fructose corn syrup, ADM can afford to settle. It carries little debt and a lot of cash. Potential government fines of as much as $30 million would have little impact. In addition, ADM has agreed to conclude what's considered the most onerous of its civil litigation for $25 million. The company and once-recalcitrant Chairman and Chief Executive Dwayne O. Andreas are expected to launch talks with federal investigators soon. ADM declined to comment on the probe.

It was clearly the investigation that led to pro-shareholder steps aimed at changing the company from a family-run patriarchy. "We need a board that is more diversified and more global in its approach," says G. Allen Andreas Jr., Dwayne's nephew and a vice-president and counsel to ADM's executive committee. Eight of the 17 directors are expected to step down this fall. Three new outside directors have been selected, and investors are pushing for more heavyweight outsiders in coming years. As management influence wanes, pro-shareholder moves could follow, such as higher cash dividends and a formal link between executive pay and stock performance, which are unrelated today.

Activists still have plenty to fault. One of the new, clean-sweep candidates for the board is a relative of an ADM executive. Such an insular, informally run company may not change its stripes soon. "They still don't get it," says Richard H. Koppes, general counsel of the California Public Employees' Retirement System. And investors have reason to worry about succession: Vice-Chairman Michael D. Andreas, son of the 78-year-old CEO, has been told that he and ADM Vice-President Terrance S. Wilson will be indicted this fall on charges related to price-fixing. The expected departure of those executives could create a vacuum. "I don't think there's a benchful of people being nurtured as successors," gripes Edward J. Durkin, assistant director of the United Brotherhood of Carpenters' pension fund, which owns 775,000 ADM shares. ADM says more than a dozen company executives are "capable of filling the top jobs."

Still, bullish Wall Street analysts believe that ADM could support a stock price in the mid-20s, vs. 18 3/8 on Aug. 7. "The ball has started to roll" in ADM's evolution to a shareholder-driven business, says John M. McMillin of Prudential Securities Inc. The key question is just how fast.

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