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Archer Daniels (ADM) Rises More Than 21% YTD: Can It Continue?

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Archer Daniels Midland Company (ADM - Free Report) has been gaining from favorable demand for the majority of its products. Solid performances in its Ag Services & Oilseeds, Carbohydrate Solutions, and Nutrition segments have been key growth drivers. This led to year-over-year revenue growth of 40.8% in second-quarter 2021, with revenues at the nutrition unit rising 20.6%. The nutrition segment’s adjusted operating profit grew 27.2% year over year, owing to significant gains in Human and Animal Nutrition units.

Within the Human Nutrition unit, the North America and EMEA regions gained from strength in the flavors business, stemming from higher volumes and better product mix, particularly in the beverage segment. Sales growth in specialty proteins aided the Specialty Ingredients unit, while robust sales and margins in probiotics contributed to the Health & Wellness category.

Positive demand and margins in amino acids, strength in feed additives and ingredients, and improved performance in the EMEA region aided results for the Animal Nutrition unit. Management lifted the 2021 operating profit growth guidance for the Nutrition segment to 20%.

It also remains on track with its three strategic pillars — optimize, drive and growth. Under the optimize pillar, the company is on track with improvement in its key businesses — the Decatur complex, Golden Peanut and Three Nuts. It also continues to adapt to consumers’ changing nutritional preferences. Under its drive pillar, the company continues to adapt to its organizational structure to reach operational excellence and set goals. Under the growth pillar, management is looking to expand its footprint in fast-growing alternative protein. The company is also making efforts to enhance its animal nutrition capabilities along with advanced innovative technologies and improved operating capabilities.

The upsides led to strong second-quarter 2021 results, wherein the top and the bottom lines surpassed the Zacks Consensus Estimate and advanced year over year. This marked the company’s eighth straight quarter of an earnings surprise.

Driven by a solid start to 2021 and continued momentum in the second half of 2021, the company envisions another year of strong earnings growth. The annual earnings growth rate is likely to be in high-single digits. It is also progressing well with its Readiness program, which is focused on accelerating and enhancing competitiveness.

Consequently, shares of this Zacks Rank #3 (Hold) stock have gained 21.4% year to date compared with the industry’s growth of 3.9%.

 

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However, Archer Daniels remains exposed to headwinds, including higher performance-related compensation, project-related costs, and the shifting of costs from business segments into the centralized centers of excellence in supply chain and operations. Management also foresees tightening of the corn markets, which is likely to weigh on ethanol margins and hurt the Carbohydrates Solutions segment in third-quarter 2021.

Bottom Line

We believe that Archer Daniels is likely to sustain its positive momentum on the back of solid demand and strength in the nutrition unit. The Zacks Consensus Estimate for 2021 earnings is pegged at $4.79 per share, indicating an increase of 2.1% in the past 30 days. Topping it, a VGM Score of A and a long-term earnings growth rate of 8.2% reflect its inherent strength.

Better-Ranked Stocks to Consider

Chewy (CHWY - Free Report) currently has a long-term earnings growth rate of 20% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Associated British Foods (ASBFY - Free Report) currently has an expected long-term earnings growth rate of 14.3% and a Zacks Rank #2.

Hormel Foods Corporation (HRL - Free Report) , also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 7.4%.