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Tough Industry Hurt Archer Daniels (ADM) Stock: What's Ahead?

Zacks Equity Research

Archer Daniels Midland Company ADM has been in soup due to the tough operating environment in the Agricultural industry stemming from fluctuating commodity prices and oversupply in the industry. This has been largely weighing upon the company’s top and bottom lines, keeping margins strained. The cumulative effect of this is visible in the company’s stock movement in recent months.

Notably, Archer Daniels stock declined 7.3% in the last three months, underperforming the industry’s 5.6% downside. Moreover, the stock has witnessed a fall of 5.4% since reporting dismal third-quarter 2017 results on Oct 31, 2017. This resulted in the company fall to Rank #5 (Strong Sell) on Zacks list. That said, let’s peek into the factors behind Archer Daniels’ doom.

Industry Trends Lead to a Drab Surprise History

The aforementioned industry concerns have been persistently hurting Archer Daniels’ quarterly performance over the past few years. This has been significantly weighing upon the company’s top-line in all segments, leading to a dismal sales surprise for more than three years now. Moreover, the company has posted negative earnings surprise in three of the trailing four quarters. Consequently, it has recorded an average negative earnings surprise of 4.1% in the trailing four quarters.

Archer-Daniels-Midland Company Price and EPS Surprise

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

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. Based on the dismal third-quarter performance and negative surprise trend, we remain apprehensive about the company’s future performance.

Segmental Hazards Hurt Margins

Additionally, the company’s margins remain under pressure due to soft operating performance at the Agricultural Services and Oilseeds Processing segments. Adjusted operating margin declined 16.8% in the third quarter. 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.

Is There Hope for Improvement?

While the company’s operating performance trend is not very encouraging, it remains committed to strengthen 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.

Further, Archer Daniels is transitioning 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, in the fourth quarter. It also remains on track to exceed cost savings target of nearly $225 million for 2017. These initiatives provide a ray of hope in the otherwise tarnished performance graph of the company.

Not Done with Consumer Staples Stocks Yet? Check These

Better-Ranked stocks in the sector include The Boston Beer Company Inc. SAM, Ollie's Bargain Outlet Holdings, Inc. OLLI and Brown-Forman Corporation BF.B, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boston Beer, with long-term EPS growth rate of 5%, has increased 43.5% in the last six months.

Ollie's Bargain has increased 22.5% in the last three months. Moreover, the company has an expected long-term earnings growth rate of 23.5%.

Brown-Forman has grown 19.2% in last three months. Additionally, the company has to its credit a solid earnings history as it delivered an average positive earnings surprise of nearly 7% in the trailing four quarters.

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