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Despite rising commodity costs, Archer Daniels Midland’s long-term outlook good

Written By: Kimberly Elsham on February 2, 2012 No Comment

 

Photo courtesy of ADM

Archer Daniels Midland Co. hit a bump in the road last quarter, but that shouldn’t discourage long-term investors, as the company has shed risky domestic projects and is refocusing its overseas investments.

For the past few quarters, the company had been posting robust earnings, particularly during the second fiscal quarter last year, when Decatur-based ADM reported $732 million in net income. However, for the same period this year, earnings took a surprise nosedive. ADM posted net income of $80 million for the second fiscal quarter that ended Dec. 31, 2011, 89 percent below the quarterly profit a year ago.

This result missed estimates by a long shot: ADM reported earnings of only 12 cents per diluted share compared with analysts’ consensus estimate of 77 cents.

These poor results were blamed on weak performance from several key businesses: corn processing, oilseeds processing and exports. Rising commodity costs, particularly in corn and cocoa beans, really hurt ADM and could continue to drag down earnings for at least the next year.

Yet U.S. crop yields are forecasted to be higher, signaling cheaper prices ahead. A report released by the Congressional Budget Office said the average cash price should fall from last year’s average of $6 per bushel to $4.54 in the 2013 marketing year starting Sept. 1. Weak European demand also hurt ADM’s earnings, and the ongoing European debt crisis will likely keep the demand for U.S. imports low.

A big write-down last quarter hit ADM’s earnings, but according to analysts this was a good move. The company incurred $339 million in impairment charges for closing a renewable plastics production plant in Clinton, Iowa. Though it has invested in this business since 2006, the return on investment wasn’t looking bright, so the company chose to shut it down.

ADM’s financial position is also looking healthier. For the six-month period that ended Dec. 31, 2011, ADM increased its cash and equivalents to $864 million, up 64 percent from $526 million during the same period last year. It also shed much of its short-term debt in the last quarter to $834 million, down 85 percent from $5.6 billion it held it short-term debt during the same period last year.

Another positive sign is that ADM is turning its inventory and production into cash more quickly. The so-called cash conversion cycle stands at 28.66, the lowest it’s been since the third fiscal quarter of 2007.

The market seems pretty confident in ADM in light of last quarter’s hiccups. The stock plummeted 4 percent on the earnings news Tuesday, but has since rebounded to just over $29 a share. That’s 17 percent lower than a year ago, but only 2 percent lower than it was at the start of 2012, and right in the middle of ADM’s 52-week range. By comparison, Bunge Limited is trading at nearly $58 a share, close to its 52-week low, and General Mills Inc. is trading around $40 a share, near its 52-week high.

The company cut its capital spending to $1.7 billion from  $2 billion for the current fiscal year. Even so, ADM is refocusing some of its investment activity to ventures and acquisitions abroad, as opposed to risky domestic projects. Deutsche Bank analysts Christina McGlone and Andrew Kieley said this move should boost ADM’s earnings in the long run.

Things to watch for: Eastern European countries imposing grain export duties, U.S. crop yields, South American grain harvest and the European debt crisis.

ADM appears to be reacting quickly to an increasingly volatile global agricultural market, which bodes well for its future. Companies that are prepared and financially able to adapt are more likely to provide steady returns for investors.

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