Shares of Archer Daniels Midland Company (ADM - Free Report) have reached a 52-week high of $46.41 on Jun 20, though it closed a tad lower at $46.17. Year to date, the stock has gained 16.9%, outperforming the industry’s 8% rise. This upside can be primarily attributed to the company’s robust growth strategies, including progress on its portfolio management initiatives, cost-savings plan and Readiness program.
Moreover, Archer Daniels began 2018 on a solid note with first-quarter earnings and sales surpassing estimates and improving year over year. Notably, this marked the company’s return to growth trajectory, reversing its more than three-year long trend of missing sales estimates while earnings topped for the second straight quarter.
Results benefited from increased revenues as well as higher operating profit and lower tax rate. Moving ahead, management expects to deliver solid results in 2018, courtesy of improved market conditions, gains from U.S. tax reform, product innovations and Project Readiness.
Analysts are growing bullish on the stock as well. This is apparent from the upward revisions in its earnings estimates. The Zacks Consensus Estimate of $3.09 for 2018 and $3.17 for 2019 increased 3.7% and 2.3%, respectively, in a month.
Strategies Supporting Archer Daniels’ Growth
Archer Daniels’ strategic initiatives for business portfolio management are expected to help in realizing value and investing the same in best possible resources to enhance returns. In this regard, the acquisitions of glucose and starch maker, Chamtor, and purchase of 90% stake in BIOPOLIS (leading microbial technology provider) are worth mentioning.
Notably, the Chamtor buyout helped Archer Daniels to expand its sweetener and starch capabilities in Western Europe. Simultaneously, it has also undertaken few divestitures to streamline portfolio. These acquisitions and divestitures are expected to enhance the company’s portfolio besides improving its knowledge and boosting results.
Additionally, Archer Daniels remains focused on strengthening its business through increased cost savings — a key component of its long-term strategy. Management targets $550 million in additional run rate cost savings 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.
In the first quarter of 2018, the company generated operational cost savings of $70 million on a run rate basis and is on track to exceed the targeted $200 million savings for 2018. Going ahead, it is expected to focus on lower capital spending and generate benefits from the aforementioned investments.
Archer Daniels has also been enhancing its operational efficiency at production and supply chain networks, in order to curtail costs. In sync with this, the company is on track with its business transformation, under its 1ADM program, which forms an integral part of Project Readiness. It expects Readiness to help management have a more coordinated approach toward driving business improvement, standardizing functions and enriching consumers’ experience.
Further, Archer Daniels plans to allocate resources efficiently and make prudent business investments. In 2018, the company remains on track with further 1ADM rollouts to cover the entire enterprise.
Management also realigned its business into four segments — Carbohydrate Solutions, Nutrition, Oilseeds and Origination — to accelerate growth and resonate well with changing customers’ needs. These new business segments are expected to clearly differentiate the company’s product and service offerings besides justifying its operating structure.
Additionally, these segments will help Archer Daniels provide value-added and exclusive product assortments, thus boosting growth across its business portfolio. Moving ahead, Archer Daniels plans to remain focused on five major platforms, animal nutrition, bioactives, carbohydrates, human nutrition and taste along with geographic regions to drive growth.
Despite these tailwinds, significant global presence exposes Archer Daniels to adverse currency translations. Also, intense competition in all its segments and volatile commodity prices remain threats.
Nevertheless, we believe Archer Daniels’ focus to drive growth on its solid strategic actions might help this Zacks Rank #3 (Hold) company overcome such challenges.
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