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Here's Why Archer Daniels' (ADM) Q1 Earnings May Decline Y/Y

Zacks Equity Research

Archer Daniels Midland Company ADM is slated to report first-quarter 2019 results on Apr 26, before market open.

Although the company came up with an average trailing four-quarter earnings beat of 21.5%, it witnessed a negative earnings surprise in the previous quarter.

Archer Daniels Midland Company Price and EPS Surprise

Archer Daniels Midland Company Price and EPS Surprise | Archer Daniels Midland Company Quote

How Are Things Shaping Up Prior to 1Q19

Archer Daniels’ recent disclosures about adverse winter weather conditions in North America indicate that the company is set to witness soft first-quarter results. Management notified that colder-than-normal winter weather has significantly hurt the company’s North American operations. Heavy snow and rain storms in March, followed by floods and its after-impacts are likely to weigh on the company’s Carbohydrates Solutions and Origination segments’ results.

Further, the extreme cold weather affected corn processing volumes on account of a slowdown in rail and truck transportation, which lowered shipments. In addition, the corn processing facility in Columbus, NE, remained idle due to flooding and presently functioning at reduced rates. Adverse river conditions since December have also been reducing barge transportation movements and port activities.

These afore-mentioned weather disruptions are likely to hurt the company’s pre-tax operating profit to the tune of $50-$60 million in the to-be-reported quarter. This impact will be almost equal at the Carbohydrate Solutions and Origination units, along with small impacts on the other segments.

As it is, Archer Daniels has been witnessing sluggishness across its Carbohydrate Solutions segment for a while now, which remain a concern for the to-be-reported quarter. Soft Bioproducts results, and lower ethanol margins and volumes are hurting the segment’s performance. Also, lower margins and sales in EMEA as well as elevated costs in North American liquid sweeteners owing to lower production rates at Decatur complex remain deterrents.

Consequently, Archer Daniels’ is expected to perform disappointingly in the first quarter.  The Zacks Consensus Estimate for first-quarter earnings is pegged at 62 cents, indicating an 8.8% decline from the year-ago quarter. Notably, estimates have witnessed downward revisions over the past 30 days. For quarterly revenues, the consensus mark stands at $13.7 billion, down more than 11% year over year.

On the fourth-quarter 2018 conference call, the company stated that it expects the Carbohydrate Solutions segment’s overall results to decline year over year in the first quarter. This projection can be attributed to persistent pressure on European sweetener and North American ethanol industry margins as well as issues related to the Decatur plant.

Nevertheless, Archer Daniels’ focus on cost savings, management of business portfolio and Project Readiness appear encouraging. Also, the company is enhancing its nutrition portfolio, with citrus ingredients and flavors. Management remains focused on five major platforms — animal nutrition, health & wellness, carbohydrates, human nutrition and taste — to drive growth in the quarter to be reported.

Furthermore, at the Nutrition segment management expects increased profits in first-quarter 2019. This will be backed by operational improvements and gains from acquisitions as well as higher margin and sales. Also, the segment’s operating profit is projected to be significantly higher than the year-ago quarter.

At Oilseeds, results will be impressive in the first quarter, excluding the biodiesel tax credit impacts in the prior-year period. Crushing and origination’s robust volumes, and gains from Algar, SoyVen and North American plant expansions are likely to boost the segment’s results.

A Glance at the Zacks Model

Our proven model does not conclusively show that Archer Daniels is likely to beat earnings estimates in the first quarter. A stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if they have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Archer Daniels has a Zacks Rank #4 and an Earnings ESP of 0.00%.

Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to beat estimates:

The Estee Lauder Companies Inc. EL has an Earnings ESP of +1.16% and a Zacks Rank #2. You can seethe complete list of today’s Zacks #1 Rank stocks here.

Church & Dwight Co., Inc. CHD has an Earnings ESP of +0.30% and a Zacks Rank #2.

Keurig Dr Pepper Inc. KDP has an Earnings ESP of +1.08% and a Zacks Rank #3.

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