A month has gone by since the last earnings report for Archer Daniels Midland (ADM). Shares have lost about 6.1% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is ADM due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Archer Daniels Q1 Earnings Miss Estimates, Down Y/Y
Archer Daniels reported disappointing first-quarter 2019 results, wherein earnings missed the Zacks Consensus Estimate for the second straight quarter and also declined year over year.
Adjusted earnings of 46 cents per share decreased 32.4% from the year-ago quarter and lagged the consensus mark of 62 cents. On a reported basis, the company’s earnings came in at 41 cents per share, down from 70 cents earned in the prior-year quarter.
Management stated that adverse winter weather conditions in North America have negatively impacted the company’s operations in the first quarter. A weak ethanol industry environment remained an added headwind.
Revenues totaled $15,304 million, which dipped 1.4% year over year but outpaced the Zacks Consensus Estimate of $13,702 million. Revenue decline across all the segments of the company, except Nutrition, was the primary reason behind the downside.
Going by segments, quarterly revenues at the Origination, Oilseeds, Carbohydrate Solutions and Other segments fell 2.3%, 3.4%, 7.6% and 23.6% to $6,124 million, $5,414 million, $2,403 million and $81 million, respectively. Conversely, at Nutrition revenues improved 34.9% to $1,282 million.
Archer Daniels reported adjusted segment operating profit of $608 million in first-quarter 2019, down 15.2% from the year-ago quarter. On a GAAP basis, the company’s segment operating profit fell 13.2% year over year to $611 million.
On a segment basis, adjusted operating profit at the Oilseeds segment dipped 2.3% year over year to $341 million owing to soft results at Refining, Packaging, Biodiesel and Other. Also, lower Wilmar results in Asia hurt the segment. However, Crushing and Origination results were impressive driven by higher crush margins and favorable timing effects. Nevertheless, this was somewhat offset by fall in Chinese demand on South American origination and impact of slow farmer selling.
Adjusted operating profit at the Origination segment amounted to $76 million, up 65.2% from the year-ago quarter. This upside was mainly due to robust Merchandising and Handling, and Transportation results on a year-over-year basis. Moreover, effective execution drove margins in North American grain as well as solid performance in structured trade finance and reversal of some timing impacts from the previous quarter aided the segment’s performance. However, this was offset by soft global trade performance, which was affected by normalized South American soybean and soybean meal margins versus year-ago period.
At the Nutrition segment, adjusted operating profit decreased 15.6% to $81 million as robust WFSI results were offset by weak performance at Animal Nutrition. In fact, WFSI registered 21% growth in profit across its all three businesses. Also, WILD Flavors remained sturdy and sales grew 11% at constant currency. Higher product mix is an added positive. However, the Neovia buyout that concluded in January led to higher up-front costs associated with inventory revaluation and hurt results at Animal Nutrition. Notably, lysine production and yields have been improving from production disruptions in the third quarter of 2018. This, in turn, is likely to accomplish normalized yields by second-quarter end.
The Carbohydrate Solutions segment’s adjusted operating profit plunged 54.9% to $96 million. The downside can mainly be attributed to soft Bioproducts results along with lower ethanol margins in a challenging industry landscape. Also, production volumes were hurt by unfavorable weather. Starches and Sweeteners were also impacted by weak European sweetener industry volumes and margins as well as escalated manufacturing expenses at the Decatur complex and lower margins in flour milling.
Archer Daniels ended the first quarter with cash and cash equivalents of $926 million, long-term debt including current maturities of $8,289 million and shareholders’ equity of $18,910 million.
During first-quarter 2019, the company generated negative cash flows of $2,035 million from operating activities. Further, the company’s trailing four-quarter adjusted ROIC came in at 7.8%.
Additionally, the company paid dividends of $198 million. Also, the board has approved a quarterly dividend hike of 4.5% to 35 cents. The new dividend will be paid on Mar 12, 2019, to its shareholders of record as on Feb 19.
Despite dismal quarterly results, management remains optimistic about its strategic initiatives including cost-saving efforts and the Readiness program. The company has also outlined a series of measures to create value and ensure long-term growth.
Firstly, the company is expected to repurpose its corn wet mill in Marshall, MN, so that it can produce higher volumes of food and starches, efficiently catering to customer demand. Secondly, Archer Daniels has been creating an ethanol subsidiary, consisting of the company’s dry mills in Columbus, NE, Cedar Rapids, IA, and Peoria, IL. This subsidiary is expected to report as an independent segment. Lastly, it is taking actions to boost agility, growth and customer service. These measures include organizational changes to standardize business processes, accelerate planned synergies from buyouts, and early retirement of some associates in the United States and Canada.
For 2019, Archer Daniels intends to minimize capital spending by 10%, ranging from $0.8-$0.9 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -23.82% due to these changes.
Currently, ADM has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, ADM has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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