Archer Daniels Held at Neutral

We have retained our Neutral stance on Archer Daniels Midland Co. ( ADM - Analyst Report ) . The company’s strong quarterly performance and continuous focus on enhancing its processing capabilities and global footprint are its strengths. However, we remain on the sidelines due to the projected rise in raw material prices in the near-term and expected decline in demand for corn-based ethanol.

Why the Reiteration?

Archer Daniels 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 provides a strong competitive advantage to the company and strengthens its well-established position in the market.

Archer Daniels posted strong results for the quarter ended Dec 31, 2012, as adjusted earnings of 60 cents per share rose 17.6% from the year-ago quarter earnings of $0.51 per share. Net sales of $24,921 million improved 6.9% year over year mainly driven by robust performances at Oilseeds and Agricultural Services segments, partially offset by weak results at the company’s Corn Processing segment.

Moreover, Archer Daniels remains extensively focused on enhancing its processing capacities, which includes expanding crushing capacities in North America, and fertilizer blending and biodiesel capacities in South America. In Europe, the company has acquired processing facilities in Czech Republic and Germany and 3 storing facilities in Slovakia. Further, the company is in talks to acquire GrainCorp, aiming to boost its market share in Australia.

In addition, in order to tap the growing global demand for crops and agricultural products, Archer Daniels is expanding its global footprint in the emerging markets, especially Asia. These initiatives offer a strong upside potential to the company in the long run.

However, we remain slightly cautious on the stock as we believe that the company’s margins may shrink further in the near-term due to rising oilseeds and corn prices resulting from weak agricultural produce in the U.S. Further, U.S. has imported higher sugar-based ethanol from Brazil to meet the growing demand of ethanol, which may adversely affect the demand for Archer Daniels’ corn-based ethanol.

Other Stocks to Consider

Besides Archer Daniels, which holds a Zacks Rank #3 (Hold), other stocks worth considering in the Farm products industry are ConAgra Foods Inc. ( CAG - Analyst Report ) , Flowers Foods Inc. ( FLO - Snapshot Report ) and J&J Snack Foods Corp. ( JJSF - Snapshot Report ) , all of which hold a Zacks Rank #1 (Strong Buy).