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Will Archer Daniels' Solid Growth Efforts Help Revive Stock?

Zacks Equity Research

Archer Daniels Midland Company ADM is in troubled waters for quite some time, primarily due to persistent softness in its Carbohydrate Solutions segment. Notably, decline in production volumes, soft Bio-products results and headwinds related to the Decatur complex are hurting the segment’s performance. A weak ethanol industry environment is an added headwind.

Consequently, shares of Archer Daniels have lost 25.8% in a year, wider than the industry’s 20.3% decline. These headwinds have also affected the company’s earnings, which lagged the Zacks Consensus Estimate for the third straight time in second-quarter 2019.

Earnings also plunged 41.2% year over year in the second quarter, while revenues decreased 4.5%. Quarterly results were hurt by persistent unfavorable winter weather conditions in North America and high water conditions in the U.S. rivers, which limited river asset utilization and the competitiveness of U.S. crops in export markets.

Revenue decline across all the segments, except Nutrition, contributed to Archer Daniels’ dismal top-line performance in the quarter.

At the Carbohydrate Solutions segment, revenues fell 7.8% owing to adverse weather in North America that impacted results in Starches and Sweeteners, and Bio-products. Further, the segment’s adjusted operating profit plunged 22.3% mainly due to weak Bio-products results on account of negative ethanol industry margins. Weather-related impacts affected the segment’s revenues by nearly $15 million. Moreover, margin contractions on account of low sugar prices and the Turkish quota on starch-based sweeteners affected the segment’s results in EMEA.

Although management expects North American Starches and Sweetener volumes to remain steady, the segment’s results are anticipated to be weak in the third quarter of 2019. It also continues to witness a challenging ethanol margin environment, particularly the recent run-up in corn prices.

Quite apparent, these factors resulted in huge downward revisions in the company’s earnings estimates. The Zacks Consensus Estimate of 78 cents and $2.86 for the third quarter and 2019 declined 19.6% and 9.5%, respectively, over the past 30 days.

Strategic Efforts & Readiness Might Aid Growth

While the aforementioned factors make us apprehensive, Archer Daniels’ significant progress on its three strategic pillars including optimize, drive and growth look encouraging. Moreover, the company is on track with its Readiness goals of driving business improvement, standardizing functions and enriching consumers’ experience.

Progress on the optimize pillar is reflected by the completion of significant global organizational changes, which include reductions in management layers, centralization of activities, removal of positions and the early retirement for eligible employees in the United States and Canada. Also, the company continued to strengthen its U.S. Origination footprint backed by an agreement with Cargill to exchange grain elevators in Illinois and Indiana.
Under the drive pillar, Archer Daniels simplified its operational model by merging the Origination and Oilseeds business segments into a single unit, Ag Services and Oilseeds.

Further, management has centralized the milling management and commercial teams in Decatur, and intends to combine the flour and corn milling businesses to boost efficiency. These simplification actions are likely to aid the company in streamlining decision-making process to drive accountability. Moreover, Archer Daniels remains committed to expand its global centers of excellence, which include key areas like technology, talent and growth.

Lastly, the growth pillar is reflected by the completion of the buyout of Ziegler Group, the leading European citrus flavor provider. This acquisition will aid Archer Daniels to become a global leader in the flourishing natural citrus ingredients space. The company continues to enhance its capabilities in Asia, and lead the industry with innovative solutions. Apparently, it introduced BIOSIPEC — a complete system for shrimp production and launched a line of renewable vegan Omega-3 blends. All these actions are likely to aid the company capitalize significant opportunities and drive results going forward.

With respect to the Readiness program, the company has prioritized 275 Readiness initiatives as of second-quarter 2019. These completed initiatives are likely to generate run-rate benefits of about $500 million on an annual basis, thus on track to deliver $1.2 billion by the end of 2020. Further, management estimates these initiatives to contribute about $250-$300 million in accrued benefits by the end of 2019.

Currently, Archer Daniels has a Zacks Rank #3 (Hold).

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