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Will Soft Sales Mar Archer Daniels' (ADM) Q4 Earnings?

Zacks Equity Research

Archer Daniels Midland Company ADM is slated to release fourth-quarter 2017 results on Feb 6. The question lingering in investors’ minds is whether this food processing behemoth will be able to deliver a positive earnings surprise in the quarter to be reported.

The company posted a negative earnings surprise of 18.2% in the last reported quarter. Moreover, it has lagged the Zacks Consensus Estimate in three of the trailing four quarters. Consequently, the company has reported average negative surprise of 4.1% in the trailing four quarters.

Additionally, the company has posted negative earnings surprise in eight of the last 10 quarters. Let’s see how things are shaping up prior to this announcement.

Archer-Daniels-Midland Company Price, Consensus and EPS Surprise

Archer-Daniels-Midland Company Price, Consensus and EPS Surprise | Archer-Daniels-Midland Company Quote

What to Expect?

The current Zacks Consensus Estimate for the quarter under review is pegged at 70 cents, reflecting year-over-year decline of about 6.7%. Further, we note that earnings estimate for the quarter has declined by 1 cent in the last 30 days. Analysts polled by Zacks expect revenues of $16.4 billion, down 0.9% from the year-ago quarter.

Furthermore, the company has a negative sales surprise history having lagged estimates for over three years now. This led Archer Daniels to underperform the broader Consumer Staples sector in the past year. The company’s shares dipped 2.6%, while the sector ascended 12.8%. The company’s dismal top-line performance makes us slightly skeptical about its upcoming results.

Factors at Play

Archer Daniels has a dismal sales surprise trend due to lower sales at all segments. This drab performance history can be attributed to the fluctuating commodity prices, oversupply in the industry and unfavorable margins. In the most recent third-quarter 2017, earnings were hurt by a tough operating environment at the company’s Agricultural services and Oilseeds Processing segments, while sales declined across all segments.

Additionally, the company’s margins remain under pressure due to soft operating performance at the Agricultural Services and Oilseeds Processing segments. Margins at Agricultural Services segment were hurt by soft merchandising and handling results for North America Grain due to lack of competitiveness of U.S. corn and soybeans in global markets. Further, lower crushing margins as well as lower South American origination margins resulted in reduced margins at Oilseeds Processing segment. Based on the dismal third-quarter performance and negative surprise trend, we remain apprehensive about the company’s future performance.

However, Archer Daniels remains committed to strengthening capacities and geographic spread, through buyouts and other organic expansions. These factors and the prospects from Project Readiness, position it to deliver solid bottom-line growth in 2017. Moreover, the company’s transition from a period of costs and investments in acquisitions, new innovation centers and facilities, to focusing on reducing capital spending and increasing benefits from investments, is likely to aid results.

What the Zacks Model Unveils?

Our proven model does not conclusively show that Archer Daniels is likely to beat earnings estimates this quarter. This is because 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. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Archer Daniels currently has an Earnings ESP of +2.14%, as the Most Accurate estimate of 72 cents is pegged higher than the Zacks Consensus Estimate of 70 cents. However, it carries a Zacks Rank #4 (Sell). The combination of Archer Daniels’ Zacks Rank #4 and Earnings ESP of 2.14% makes surprise prediction difficult.

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 post an earnings beat:

United Natural Foods, Inc. UNFI has an Earnings ESP of +5.67% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Campbell Soup Company CPB has an Earnings ESP of +0.41% and a Zacks Rank #3.

The J.M. Smucker Company SJM has an Earnings ESP of +0.66% and a Zacks Rank #3.

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United Natural Foods, Inc. (UNFI) : Free Stock Analysis Report
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