Speculating on Drought
As food prices rise, Americans traditionally trade down. Instead of steak, we go for hamburger. When the impact of currency fluctuations are taken out, the company's most recent "earnings miss" actually turns out to be in line with expectations at $1.39/share, as Business Insider notes.
McDonald's has a steady profit margin of 20%, a steady operating margin of nearer to 30%. The balance sheet shows as much cash as a typical quarter shows gross profit, so it can handle the shocks that a global company takes.
In short, I expect prices to rise, but that means sales will rise. And I don't expect much earnings compression from the coming food inflation. McDonald's is a buy.
ADM(ADM) , by contrast, looks like a sell. It's currently trading midway between its 52-week high and 52-week low.
ADM's business model is based on an abundance of corn and soybeans. It's the largest processor of both commodities and the largest exporter. It pioneered the use of corn for corn syrup and for ethanol, but the former is going to be less competitive with cane sugar, and production of the latter is declining quickly as corn prices rise.
The only hint I've seen of ADM trouble is this Motley Fool study questioning the validity of reported cash flow numbers. The company has a cash cushion of barely $1.25 billion, with a debt-to-assets ratio of about 25% and over $21 billion in quarterly revenue. It lacks the financial flexibility to hide bad news.
ADM is due to report earnings at the end of this month. ADM's previous earnings statement was bad, and it blamed results in ethanol and oilseeds.
The current quarter and the next quarter are bound to be worse. Yes, I can almost hear you rubbing your hands in glee.
At the time of publication, the author was long MCD.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.