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Wall
Street Journal
Heard on the Street
Archer-Daniels'
Cornstarch-Based Additive
To Degrade Plastic May Aid Well-Valued Issue
By
Scott Kilman
11/06/1989
The Wall Street Journal
CHICAGO
-- It's as if a sod farmer suddenly discovered diamonds in the dirt.
Archer-Daniels-Midland,
a venerable grain processing company, has taken the unusual step of developing
a prospective weapon in the war on garbage: a cornstarch-based compound
that helps accelerate the breakdown of plastics. Investors are intrigued
by the discovery.
The
market increasingly views the Decatur, Ill., company as solid long-term
investment with a pinch of razzle-dazzle, a sort of Old Faithful with
big, unglamorous businesses that might eventually be able to turn on a
gusher of profits from its trash technology.
"I look
at this degradable thing as icing on the cake," says Clinton O. Mayer
III, a Bear Stearns analyst. "In relation to the balance sheet and earnings
prospects, the stock is a relative value without" any earnings from degradables.
Even with the shares up more than 45% this year, "we can make a case for
the company based on the fundamentals."
Mr.
Mayer explains: "In eight of the past 10 years, earnings have increased.
Profits can be affected by supply and demand and by weather. But they
are in very basic products, like sweeteners, soybeans and flour. They
are less cyclical than most companies." The stock trades at around 12
times earnings and finished at 29 7/8 Friday.
Degradable,
of course, is today's buzzword in plastics. As growing numbers of states
and towns consider requiring the use of such plastic in trash bags, some
analysts are churning out forecasts for a $1.5 billion-a-year degradable
plastics industry by 1995. (Degradable garbage bags and diapers are on
store shelves now, and everything from milk jugs to syringes are on the
drawing board).
Away
from Wall Street, however, some experts aren't sure Archer-Daniels can
capture the hefty sales analysts expect, at least not any time soon. The
most bullish contingent has speculated that the company might reap a $2-a-share
profit from trash technology in a few years.
"I am
confused by these numbers, as other people ought to be," says George A.
Makrauer , president and chief executive officer of Amko Plastics,
a Cincinnati company that uses the Archer-Daniels additive to make degradable
plastic bags. "It is a relatively new technology, and there are so many
unknowns about it."
Even
Archer-Daniels is cautious. "We aren't Pollyanna-ish," says a company
spokesman. He says the business is too new to give a strong sense of its
potential. But Archer-Daniels doesn't expect its degradable additive to
overshadow its two principal processed-corn products -- sweeteners and
ethanol -- in the foreseeable future.
Moreover,
it isn't clear that Archer-Daniels' corn-based method will come out on
top. Two years ago, the company bought the rights from a British researcher
for a method of blending cornstarch with plastic. (Molecules of conventional,
petroleum-based plastic are too long for soil-dwelling organisms to attack.
The starch gives the bugs a foothold.) Archer-Daniels is filing for a
second patent based on its own improvements.
Some
grocery chains are stocking photodegradable plastic products, designed
to deteriorate when exposed to sunlight. Archer-Daniels also has competition
for its so-called biodegradable additive. St. Lawrence Starch, of Mississauga,
Ontario, also makes a corn-based compound. In Champaign, Ill., tiny Agri-Tech
Industries has the license to use a technique developed by Agriculture
Department scientists.
The
future size of the market for degradable plastic is hard to forecast because
it hinges largely on the amount of legislation spurring its use. Consumers
left to their druthers in the grocery store haven't yet shown that they
are willing to foot the additional expense of buying specially treated
plastic products.
Making
such technology affordable would appear to be far down the road. Until
then, some Wall Street analysts advise buying Archer-Daniels stock for
more mundane reasons.
Because
farmers are rebuilding stockpiles cut by the 1988 drought, crop prices
are falling, thereby reducing Archer-Daniels' processing costs. Corn-sweetener
price wars are abating, and demand for Archer-Daniels soybean products,
used in such things as poultry feed, remains strong.
Leonard
G. Teitelbaum of Merrill Lynch expects per-share earnings of $2.65 to
$2.75 for the fiscal year through June 1990. George S. Dahlman of Piper,
Jaffray & Hopwood in Minneapolis estimates $2.55 a share, up from
the $2.27 posted for fiscal 1989. --- Archer-Daniels-Midland (NYSE; Symbol:
ADM)
Business:
Processes and sells agricultural commodities
Year
ended June 30, 1989: Net income: $424.7 million; $2.27 a share*
First
quarter, Sept. 30, 1989: Per-share earnings: 63 cents vs. 49 cents*
Average
daily trading volume: 524,214 shares
Common
shares outstanding: 187.4 million
*Figures
are adjusted for a 5% stock dividend paid in September 1988
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