We have maintained our long-term Neutral recommendation on the world’s leading food processing company, Archer Daniels Midland Company (ADM) with a target price of $36.00, following its weaker-than-expected first-quarter 2013 results, offset by positivity surrounding the recent bid to acquire GrainCorp. Moreover, shares of Archer Daniels carry a Zacks Rank #3 (Hold).
Why the Reiteration?
Archer Daniels is one of the leading players in the global food processing industry and commands a massive network of more than 680 processing and sourcing facilities and 27,000 vehicles operating across the Americas, Europe and Asia for transportation of agricultural commodities. This provides a strong competitive advantage to the company and strengthens its well established position in the market.
We believe that Archer Daniels’ consistent focus on enhancing its processing capabilities and global footprints through strategic acquisitions and joint ventures (:JV) bode well for future growth. This was evident from its recent success in wooing Australia’s agri-products dealer, GrainCorp Limited. The company recently entered into an agreement to acquire GrainCorp, approving to pay A$12.20 per share in cash with the aggregate transaction value amounting to $3.4 billion.
Archer Daniels interest in acquiring GrainCorp is in sync with its growth strategy, as it will not only fortify its financial position but provide an opportunity to serve the fast-growing markets in the Middle East, Africa and Asia.
On the flip side, the company posted weaker-than-expected results in the recently concluded quarter with sales and earnings coming below the Zacks Consensus Estimate. The company’s results suffered mainly due to weak performance at its operating segments. The company’s operating margins slumped due to weak operating performance at the Agricultural Services and Oilseeds Processing segments.
Nevertheless, our cautioun over the stock’s performance relates to the anticipated rise in prices of raw materials in the near term, resulting from the weak agricultural produce in the U.S., which may ultimately hurt the company’s margins.
Other Stocks to Consider
Until any further upward revision in Archer Daniels’ Zacks Rank, other stocks in the farm products industry that are worth considering include Flowers Foods Inc. (FLO), Campbell Soup Company (CPB) and J&J Snack Foods Corp. (JJSF). Of these, Flowers Foods has a Zacks Rank #1 (Strong Buy), while Campbell and J&J Snack carry a Zacks Rank #2 (Buy).
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