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Improved Earnings Required Before Archer-Daniels-Midland Company (NYSE:ADM) Shares Find Their Feet

Simply Wall St
·3 mins read

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider Archer-Daniels-Midland Company (NYSE:ADM) as an attractive investment with its 14.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Archer-Daniels-Midland as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Archer-Daniels-Midland

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Want the full picture on analyst estimates for the company? Then our free report on Archer-Daniels-Midland will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Archer-Daniels-Midland's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 35% last year. The latest three year period has also seen an excellent 32% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 5.9% per year as estimated by the ten analysts watching the company. That's shaping up to be materially lower than the 14% each year growth forecast for the broader market.

With this information, we can see why Archer-Daniels-Midland is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Archer-Daniels-Midland's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Archer-Daniels-Midland maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 3 warning signs for Archer-Daniels-Midland you should be aware of, and 2 of them are potentially serious.

Of course, you might also be able to find a better stock than Archer-Daniels-Midland. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.