Archer Daniels Midlands Can Improve After Weak Third Quarter Results

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Nov 24, 2014

Archer Daniels Midland (ADM, Financial), the world’s largest corn producer, delivered strong results in the recently reported third quarter, making significant progress in improving its earnings. However, revenue declined marginally. The company is now focused on improving its performance in the coming quarters. But, Archer is quite defensive about its moves, as the company is projecting lower Ethanol margins in the coming quarters. But, it is also seeing strength in other segments, which can help it offset the negative effect of this expected decline. With various other strategies in line, let us have a look at the overall business of Archer Daniels.

Quarterly performance

In the recently reported quarter, Archer posted revenue of $18.18 billion, which decreased from $21.39 billion in the same quarter last year. This also fell short of analysts estimates of $21.1 billion. But, the company posted an impressive improvement in profit, which nearly doubled as compared to the same period last year. It posted $0.81 per diluted share, which is double as compared to $0.46 per diluted share it reported last year.

Corn processing for Archer remains the key for its good growth momentum. With this, Archer managed its product mix to serve strong demand, optimizing its margins in the process. The company, however, is disappointed with the decline it saw in the top line. It is now working with various strategies to improve its operations and achieve profitability. It also seeing good growth across its international merchandising.

Making positive efforts

Archer is also making efforts to advance its portfolio management. The company has also signed a deal to sell its global chocolate business. To advance its growth strategy, Archer has also reached an agreement to acquire Speciality Commodities, which is expected to add wings to its growth momentum. In addition, Archer has also acquired Wild Flavors, which is also looking like a wise move.

Any company can attract investors by its strong balance sheet, and Archer is one such company that is also making advances to add value to its balance sheet. It has already announced the buyback of 18 million shares. Further, it is planning to buyback another 10 million shares by the end of the fiscal year.

The company is also making many other acquisitions, which it thinks to be beneficial for the long run. It has recently announced the acquisition of Harrell Nut, which is one of the largest seller and processors of pecans in the U.S. This will help the company to enhance its offerings.

Concerns

However, there are some points on which the company should keep a watch. Analysts are expecting the Ethanol margins to be lower in the coming quarters. The lower petroleum prices and smaller spread between gasoline and Ethanol is expected to negatively affect the company which will impact the demand for alternative fuel. This can lead to lower sales and erode its margins. However, Archer is making efforts to defend itself from this situation.

But, the company is not much worried about this situation as it is seeing strength in corn-based Ethanol. The company expects this business to stay strong despite sliding energy prices.

Conclusion

With a trailing P/E of 17.65, the stock looks reasonable. Also, the forward P/E of 14.38 shows that the earnings are expected to grow in the future. Archer also has multiple strengths that can be a growth driver for it in the future. So, as of now, Archer Daniels is a good pick.