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Archer Daniels' Strategic Efforts Look Good: Buy the Stock

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You must count on Archer-Daniels-Midland Company (ADM - Free Report) as the company appears promising buoyed by its growth initiatives, cost-saving efforts and expansion of its global footprint through strategic acquisitions. This Zacks Rank #2 (Buy) stock has yielded a return of 38.2% in the past one year and notably outperformed the Zacks categorized Consumer Staples sector that rose 6.7% in the said time frame. Further, it boasts a VGM Score of ‘A’ with a long-term earnings growth rate of 8.5%, highlighting its growth potential.



What’s Leading the Stock Higher?

Archer Daniels manages its business portfolio through strategic initiatives that are expected to help the company realize value and invest the same in the best possible resources to enhance returns. Recent actions include buyout of Crosswind Industries Inc.; enhancing production capacity and expansion of the finishing capabilities of its corn wet mills at Adana in Turkey and Razgrad in Bulgaria; selling its stake in the Australian grain handler, GrainCorp Limited; and the acquisition of Caterina Foods. We believe these initiatives are likely to solidify the company’s portfolio, improve its knowledge, help focus on consumers and drive returns.

Additionally, Archer Daniels has been continuing its investment activities for business growth. With regard to this, it shifted from domestic projects – where returns are difficult to model – to international projects that can be tracked more easily and will be accretive at a faster pace.

Not only this, the company remains focused on strengthening its business through increased cost savings, a key component of its long-term strategy. Going forward, the company targets additional run rate cost savings of $550 million over the next five years, including cost savings of $350 million from operational excellence and process enhancements, and about $200 million in incremental purchasing savings. Further, as part of its operational excellence initiatives, management revealed that it has attained approximately $250 million of run-rate savings in the first nine months of 2016 and remains on track to achieve the goal of $275 million by the end of the calendar year.

The company is also focused on cost synergy activities by addressing redundancies and removing overlapping corporate SG&A. With regard to this, the company recently opened an additional IT and support center in its WILD Flavors facility at Erlanger, KY.

Being a leading player in the global food processing industry, Archer Daniels’ network has been widespread across the Americas, Europe and Asia for transportation of agricultural commodities. Also, the company has a disciplined capital allocation strategy making investments and enhancing its shareholder returns. Management plans to hike its dividend payout ratio, from a historic band of 20%–25% of earnings to a range of 30%–40% over the medium term, which underscores Archer Daniels’ future prospects and financial strength.

However, the company's global market presence keeps it exposed to the risk of adverse currency movements. Nonetheless, Archer Daniels remains confident of delivering solid results through the rest of 2016 and 2017 on the back of improved market conditions and greater U.S. harvest, along with solid execution capabilities.

Stocks You May Consider

Other favorably-placed stocks in the broader Consumer Staples sector include Calavo Growers, Inc. (CVGW - Free Report) , Campbell Soup Company (CPB - Free Report) and Pinnacle Foods Inc. .

Calavo Growers, with a long-term earnings growth rate of 7% has gained 16.3% in the past one year. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Campbell Soup, which carries a Zacks Rank #2, has increased 13.6% in the past three months. Also, it has a long-term earnings growth rate of 5.6%.

Pinnacle Foods, a Zacks Rank #2 stock has jumped nearly 27% in the past one year. Also, it has a long-term earnings growth rate of 6.5%.

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