Archer Daniels Down 9% in 3 Months: Can Efforts Aid Recovery?

Archer Daniels Midland Company ADM has been witnessing softness across its Carbohydrate Solutions segment for the past few quarters now. This is weighing on the company’s top line, having lagged estimates in eight of the last 10 quarters including fourth-quarter 2018.

Additionally, the company has reported soft fourth-quarter results, wherein the top and bottom lines missed the Zacks Consensus Estimate. Also, it witnessed a negative earnings surprise after four straight beats, with second consecutive sales miss. Revenues fell year over year due to decline in revenues at all its segments, except the Oilseeds and Nutrition. Lower Merchandising and Handling results, including important insurance settlements in other income and dismal performance at Animal Nutrition, on account of persistent production issues were added deterrents. Furthermore, the adjusted operating profit at the company’s Origination, Nutrition and Carbohydrate Solutions segments decreased 29.9%, 15.1% and 30.9%, respectively.

Lower Bioproducts results along with weak ethanol margins and volumes have been hurting the Carbohydrate Solutions division’s performance. In addition, lower margins and sales in EMEA as well as elevated costs in North American liquid sweeteners due to lower production rates at Decatur complex remain deterrents. Going ahead, management expects the segment’s overall results to decline year over year due to persistent pressure on European sweetener and North American ethanol industry margins as well as issues related to the Decatur plant. However, these headwinds will be somewhat offset by robust Starches and Sweeteners in North America.

Consequently, shares of the company have lost 9.3% in the past three months, wider than the industry’s 7.5% decline.

Can Cost Savings & Other Initiatives Deliver Growth?

Archer Daniels remains focused on strengthening its business through increased cost savings — a key component of its long-term strategy. Notably, the company generated run-rate cost savings of more than $300 million in 2018, exceeding the targeted $200 million. Meanwhile, the company remains focused on cost synergy activities by addressing redundancies and removing overlapping corporate SG&A. Going forward, Archer Daniels will focus on lower capital spending and increasing benefits from these investments.

Moreover, the company targets $550 million in additional run-rate cost savings over the next few years. This includes cost savings of $350 million from operational excellence and process enhancements, and about $200 million in incremental purchasing savings.

Meanwhile, Archer Daniels has been enhancing its operational efficiency at production and supply chain networks to curtail costs. Also, the company has been on track with its business transformation under the 1ADM program, which forms an integral part of Project Readiness. It has been progressing well with the Readiness program and anticipates this program to make contributions of $200-$250 million to earnings by the end of 2019. Further, the program is expected to help management have a more coordinated approach toward driving business improvement, standardizing functions and enriching consumers’ experience.

In a bid to manage its business portfolio, Archer Daniels has been undertaking strategic initiatives via acquisitions and divestitures. Recently, the company concluded the Neovia buyout, which is expected to enhance its global footprint in the animal feed industry. Also, the company has been expanding its nutrition portfolio with citrus ingredients and flavors driven by the Florida Chemical Company buyout.

These apart, management remains focused on five major platforms — animal nutrition, health & wellness, carbohydrates, human nutrition and taste — to boost growth.

For first-quarter 2019, Archer Daniels issued an encouraging outlook for its Nutrition, Origination and Oilseeds segments. Management expects increased profits for the Nutrition segment, backed by operational improvements and gains from acquisitions as well as higher margin and sales. Solid growth at the North American Grain business and higher results for ARTCO is likely to drive results at the Origination division. At Oilseeds, crushing and origination’s robust volumes and gains from Algar, SoyVen and North American plant expansions will remain tailwinds.

Bottom Line

Although Archer Daniels witnessed soft results and sluggish Carbohydrate Solutions segment in the fourth quarter, we expect its growth endeavors to address these issues moving ahead.

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

You May Count on 3 Better-Ranked Consumer Staples Stocks

Newell Brands Inc. NWL delivered a positive earnings surprise in each of the trailing four quarters, the average being 39.6%. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Nomad Foods Limited NOMD has a Zacks Rank #2 (Buy). Further, the company has an expected long-term earnings growth rate of 11%.

Lamb Weston Holdings, Inc. LW, also a Zacks Rank #2 stock, has delivered average positive earnings surprise of 10.1% in the last four quarters.

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