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ADM (ADM) Down 7.5% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Archer Daniels Midland (ADM). Shares have lost about 7.5% 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 the most recent earnings report in order to get a better handle on the important drivers.

Archer Daniels Q2 Earnings Miss Estimates, Down Y/Y

Archer Daniels reported disappointing second-quarter 2019 results, wherein earnings missed the Zacks Consensus Estimate for the third straight quarter and also declined year over year.

Although sales beat the consensus mark for the second straight time, the metric declined on a year-over-year basis.

Quarterly results were hurt by persistent unfavorable winter weather conditions in North America and adverse high water conditions. A weak ethanol industry environment remained an added headwind.

Q2 Details

Adjusted earnings of 60 cents per share decreased 41.2% from the year-ago quarter and also lagged the Zacks Consensus Estimate of 61 cents. On a reported basis, the company’s earnings came in at 42 cents per share, down from $1 earned in the prior-year quarter.

Revenues in the quarter under review totaled $16,297 million, which decreased 4.5% year over year but outpaced the Zacks Consensus Estimate of $15,628 million.

Revenue decline across all the segments of the company, except Nutrition, was the primary reason behind the year-over-year decline.

Going by segments, quarterly revenues at the Origination, Oilseeds, Carbohydrate Solutions and Other segments fell 2.4%, 13.7%, 7.8% and 3% to $6,481 million, $5,747 million, $2,441 million and $104 million, respectively.

Conversely, at Nutrition, revenues improved 49.7% to $1,524 million.

Operational Discussion

Archer Daniels reported adjusted segment operating profit of $682 million in second-quarter 2019, down 26.2% from the year-ago quarter. On a GAAP basis, the company’s segment operating profit fell 28.5% year over year to $645 million.

On a segmental adjusted basis, adjusted operating profit at the Oilseeds segment decreased 14.7% year over year to $291 million owing to soft results at Refining, Packaging, Biodiesel and Other. Also, soft crushing and origination margins in South America due to higher soybean prices and lower China demand negatively impacted the segment’s results.

Further, crush volumes in North America were down owing to production outages on account of high water at the company’s Quincy, IL, facility. This had an adverse impact of roughly $10 million. However, crushing and origination results were somewhat driven by higher crush margins in North America and EMEA. Also, impressive Wilmar results in Asia aided the segment’s performance.

Adjusted operating profit at the Origination segment amounted to $71 million, down 62.8% from the year-ago quarter. This downside can be mainly attributed to lower results at Merchandising and Handling, and Transportation results on a year-over-year basis.

Despite effective execution, volumes and margins in North American were hurt by high water conditions on U.S. rivers, thus reducing river asset utilization and the competitiveness of crops in export markets. High water conditions hurt the segment by about $40 million in the quarter under review.
 
At the Nutrition segment, adjusted operating profit edged up 2.6% to $117 million owing to impressive performance at Animal Nutrition. This was primarily backed by the Neovia buyout.

However, the segment’s performance was somewhat negated by soft results at WFSI as WILD Flavors North America’s solid sales and the margin were hurt by changes in consumer order patterns in EMEAI and weak sales in APAC. Further, Specialty Ingredients was lower owing to the isolated production deficit. Meanwhile, Health & Wellness was driven by contributions from acquisitions along with organic sales and margin expansion.

The Carbohydrate Solutions segment’s adjusted operating profit plunged 22.3% to $192 million. The downside can mainly be attributed to weak Bioproducts results due to negative ethanol industry margins. Also, the persistent unfavorable weather hurt the segment’s results by nearly $15 million.

Starches and Sweeteners were also down. Moreover, margin contractions on account of low sugar prices and the Turkish quota on starch-based sweeteners affected the segment’s results in EMEA. Nevertheless, North American sales and margins remained sturdy but were offset by high water impacts at the Columbus, NE, facility.

Financials

Archer Daniels ended the quarter with cash and cash equivalents of $849 million, long-term debt including current maturities of $7,713 million and shareholders’ equity of $18,979 million.

During the first six months of 2019, the company generated negative cash flows of $2,713 million from operating activities. Further, the company’s average trailing four-quarter adjusted ROIC came in at 6.9%.

Additionally, the company paid dividends of $395 million in the first six months of 2019.

Other Developments

In second-quarter 2019, Archer Daniels took various measures to offset the impacts of adverse weather conditions in the first six months of the year. These measures are merging its Origination and Oilseeds segments into a single business — Ag Services & Oilseeds. Notably, Ag Services & Oilseeds will report as a new segment effective third-quarter 2019.

Moreover, the company has completed important organizational changes including early retirement offers for colleagues in the United States and Canada. The strategic measures also include standardizing business activities and achieving synergies from recent buyouts.

Despite soft quarterly results, management remains optimistic about delivering a stronger second half of 2019 driven by advancements made in the first half. Also, its strategic initiatives including cost-saving efforts and the Readiness program bode well.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -12.97% due to these changes.

VGM Scores

Currently, ADM has a poor Growth Score of F, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the second quintile 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.

Outlook

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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