Here's Why it is Apt to Hold Archer Daniels (ADM) for Now
Archer Daniels Midland Company ADM has been favored by investors on the back of robust global demand, continued strength in the Nutrition unit and a solid product portfolio. Also, the company has been on track with the Readiness goals of driving business improvement, standardizing functions and enriching consumers’ experience.
Additionally, an uptrend in the Zacks Consensus Estimate echoes the same sentiment. Earnings estimates for ADM’s current financial year have increased 1.2% to $6.74 over the past 60 days.
Let’s Delve Deeper
Archer Daniels has long been gaining from the robust performance in its Nutrition segment. In fourth-quarter 2022, revenues in the segment rose 7.3% year over year and 11% on a cc basis. Although the Human Nutrition unit remained dismal year over year, the Health & Wellness business witnessed growth, driven by the bioactives portfolio, including the results of the Deerland acquisition.
The Flavors unit gained from strong revenue growth, which somewhat offset demand-fulfillment challenges. Specialty Ingredients continued to witness solid demand for its product portfolio, including plant-based proteins. Management expects the Nutrition unit to remain positive in 2023, with more than 10% profit growth. Also, we expect revenues in this segment to grow 10% year over year in 2023.
In response to the growing trends for all things sustainable, Archer Daniels has been making efforts to expand its solutions portfolio, which forms part of its Carbohydrate Solutions unit. It collaborated with LG Chem to produce lactic and polylactic acids for bioplastics, which is a plant-based product. Earlier, the company launched Biosolutions to expand its portfolio of sustainable higher-margin solutions, particularly for pharmaceuticals and personal care markets.
Such endeavors are likely to help attain 10% revenue growth on an annual basis. In a recent development, Archer Daniels entered a joint venture with Gevo to help meet the demand for low-carbon, sustainable aviation fuel. It also shut down its ethanol facility in Peoria last October. The company is utilizing innovative technologies to develop products and boost operating capabilities.
As part of its readiness efforts, the company introduced a company-wide simplification initiative. The company’s strategic pillars for growth, as well as the aforementioned initiatives, are guided and supported by the Readiness program, focused on accelerating and enhancing competitiveness.
Driven by these factors, the company delivered impressive fourth-quarter 2022 results, wherein the top and bottom lines beat the Zacks Consensus Estimate and advanced year over year. This marked the 14th straight quarter of an earnings beat. Revenues advanced 13.6% year over year to $26,231 million. Solid sales across all segments contributed to the top line.
Adjusted earnings of $1.93 per share jumped 28.7% from $1.50 in the year-ago quarter. On a reported basis, Archer Daniels’ earnings were $1.84 per share, up 33.3% from the prior-year quarter’s $1.26. The company reported an adjusted segmental operating profit of $1,665 million in fourth-quarter 2022, up 17.8% from the year-ago quarter. On a GAAP basis, ADM’s segmental operating profits grew 16.1% year over year to $1,611 million. This marked the 14th straight quarter of adjusted operating profit growth.
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We note that shares of Archer Daniels have dropped 8.4% in the past three months compared with the industry’s decline of 13.4%.
Headwinds to Overcome
The company has been reeling under rising costs related to higher performance-related compensation, project-related costs and shifting costs from business segments into the centralized centers of excellence in supply chain and operations. Also, the global impacts of inflation have been concerning. The company has been witnessing higher IT operating and project-related costs. Also, elevated increased corporate costs, stemming from higher interest expenses, act as deterrents.
Conclusion
All said, we hope that strength in its nutrition unit, product innovation and solid demand will aid this Zacks Rank #3 (Hold) stock. Topping it, a long-term earnings growth rate of 6.4% and a VGM Score of A drive optimism.
Consumer Staple Stocks Worth a Look
Some better-ranked stocks are Inter Parfums IPAR, General Mills GIS and KimberlyClark KMB
IPAR has an expected long-term earnings growth rate of 15% and a trailing four-quarter earnings surprise of 36.2%, on average. Inter Parfums currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Inter Parfums’ current financial year sales and earnings suggests growth of 10.5% and 0.8%, respectively, from the year-ago reported numbers.
General Mills is a major designer, marketer and distributor of premium lifestyle products. It currently carries a Zacks Rank of 2 (Buy). GIS has a trailing four-quarter earnings surprise of 8.1%, on average.
The Zacks Consensus Estimate for General Mills’ current financial year sales and earnings suggests growth of 6.3% and 7.4%, respectively, from the year-ago reported numbers.
KimberlyClark is engaged in the manufacture and marketing of a wide range of consumer products around the world. It currently has a Zacks Rank of 2. KMB has a trailing four-quarter earnings surprise of 1.4%, on average.
The Zacks Consensus Estimate for KimberlyClark’s current financial year sales and earnings suggests growth of 2% and 5.2%, respectively, from the year-ago reported numbers.
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