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In a strategic move to use its resources in more profitable areas, agri-business giant Archer Daniels Midland Company (ADM - Analyst Report) has recently sold its 23% stake and other interests back to Mexican Corn Flour producer, Gruma S.A.B. de CV (GMK - Snapshot Report).

The deal fetched Archer Daniels $450 million, as well as an additional amount – up to $60 million – over the next 42 months on the fulfillment of certain conditions.

The company has been looking to expand its global operations while managing its portfolio and this is reflected in its recent bid for Australia-based GrainCorp Limited. Although GrainCorp rejected the takeover bid, we expect Archer Daniels to offer GrainCorp a higher price next time.

Archer Daniels’ interest in the deal also coincides with its strategy of expanding Agricultural Services and Oilseeds businesses across the globe by investing in key supply areas beyond national borders. Apart from solidifying its global footprint in the key agricultural regions through acquisitions and joint ventures, the buyout is expected to help the company ease the financial constraints as GrainCorp is a well-managed company.

Our Recommendation

We believe that Archer Daniels’ continuous focus on enhancing its processing capabilities and global footprint through strategic acquisitions and joint ventures bodes well for future growth. Moreover, it is one of the leading players in the global food processing industry and commands a massive network of more than 680 processing and sourcing facilities and 27,000 vehicles operating across the Americas, Europe and Asia for transportation of agricultural commodities.

This massive scale provides a strong competitive advantage to the company and strengthens its well-established position in the market.

However, we remain slightly cautious about the stock as the prices of raw materials may rise in the near term due to the decline in U.S. crop production, which may hurt the company’s margins. Moreover, better-than-expected sugar production in Brazil will benefit sugar-based ethanol producers and adversely affect the demand for Archer Daniels’ corn-based ethanol.

We maintain our long-term Neutral recommendation on the stock. The company carries a Zacks #3 Rank, implying a short-term Hold rating.

Currently, Archer Daniels has 30,000 workers around the world and it runs around 270 processing plants and 420 crop procurement facilities. The company’s prime competitors include Cargill Inc., Bunge Ltd. (BG - Snapshot Report), Tyson Foods Inc. (TSN - Analyst Report) and Corn Products International Inc.

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