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Why Is ADM (ADM) Up 4.8% Since Last Earnings Report?

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A month has gone by since the last earnings report for Archer Daniels Midland (ADM - Free Report) . Shares have added about 4.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is ADM due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Archer Daniels’ Q2 Earnings & Sales Beat, Up Y/Y

Archer Daniels Midland Company reported robust second-quarter 2018 results, wherein the top and bottom line outpaced the Zacks Consensus Estimate. Both the metrics also increased on a year-over-year basis. Notably, this marks the company’s third straight positive earnings surprise and second consecutive sales beat.

Q2 Highlights

Archer Daniels’ second-quarter adjusted earnings of $1.02 per share surged a whopping 78.9% year over year and substantially outpaced the Zacks Consensus Estimate of 78 cents.

On a reported basis, the company’s earnings were $1 per share compared with 48 cents in the prior-year quarter.

Revenues totaled $17,068 million, up 14.2% year over year and surpassed the Zacks Consensus Estimate of $15,797 million. The upside was driven by solid sales across all the company’s four segments and robust growth strategies.

Management has realigned its business segments into Carbohydrate Solutions, Nutrition, Oilseeds and Origination, to accelerate growth and resonate well with changing customer needs. Earlier, the company used to report operational results under the Agricultural Services, Corn Processing, Oilseeds Processing and, Wild Flavors and Specialty Ingredients segments. These changes were effective from first-quarter 2018.

According to the reclassification, the Carbohydrate Solutions segment will comprise the Corn and Milling operations; Nutrition unit will include Animal Nutrition and Bioactives businesses as well as the Wild Flavors & Specialty Ingredients segment (WFSI); the Oilseeds segment will remain unchanged; and Origination will include the Agricultural Services business, excluding Milling.

Going by segments, quarterly sales at Origination, Oilseeds, Carbohydrate Solutions and Nutrition were up 23.5%, 11%, 4.6% and 9.1% to $6,606 million, $6,675 million, $2,668 million and $1,018 million, respectively. However, the same at the Other segment remained flat with the prior-year quarter number.

Operational Discussion

Archer Daniels reported adjusted segment operating profit of $924 million in second-quarter 2018, up 40.4% from the year-ago quarter. On a GAAP basis, the company’s segment operating profit rose 40.5% year over year to $902 million.

On a segmental adjusted basis, adjusted operating profit at the Oilseeds segment climbed 69.7% year over year to $341 million. The uptick can be attributed to solid Crushing and Origination results. Moreover, this solid segment’s performance was supported by robust origination volumes and enhanced margins in South America owing to increased demand from China. Refining, Packaging, Biodiesel and Other were also up year over year. However, the growth was somewhat offset by lower contributions from Wilmar.

Further, adjusted operating profit at the Origination segment came in at $189 million, significantly up from $57 million in the year-ago quarter. This improvement was driven by gains from solid Merchandising and Handling results as well as sturdy North American Grain owing to higher volumes and margins for corn, wheat and soybean exports. Also, Global Trade’s diversified earnings base boosted the segment’s performance. Additionally, transportation results contributed to the results due to higher volumes and, ARTCO’s improving business in backhaul freight and stevedoring.

The Nutrition segment’s adjusted operating profit rose 21.3% to $114 million. The uptick was owing to solid growth at Wild Flavors and sturdy results at Animal Nutrition. Further, Specialty Ingredients, WILD Flavors and Health & Wellness witnessed higher volumes and margins in proteins.

However, the Carbohydrate Solutions segment’s adjusted operating profit declined 10.8% to $249 million. The downside can be attributed to soft Starches and Sweeteners results along with weak volumes in Caribbean operations. Further, flour milling adversely impacted the results due to unfavorable timing effects. Additionally, Bioproducts remained soft on lower ethanol production volumes coupled with increased expenses. This decrease was offset by robust starch volumes and dry sweetener margins witnessed in the quarter. Further, North American liquid sweeteners remained flat with the year-ago quarter.

Financials

Archer Daniels ended the quarter with cash and cash equivalents of $851 million, long-term debt including current maturities of $6,576 million and shareholders’ equity of $18,712 million.

In the first six months of 2018, the company generated negative cash flows of $3,179 million from operating activities.

Additionally, the company paid dividends of $379 million to shareholders in the first half of 2018.

Looking Ahead

Management remains impressed with its solid second-quarter results, which benefited from the company’s strategic initiatives and cost-saving efforts. Moving ahead, Archer Daniels remains focused on five major platforms — animal nutrition, bioactives, carbohydrates, human nutrition and taste — along with geographic regions to drive growth. This apart, the company has announced three acquisitions in the Nutrition division besides closing two new joint ventures overseas in the reported quarter.

Notably, the company has generated more than $150 million in run-rate savings. Management remains optimistic to deliver impressive results in the second half of 2018 backed by improving market conditions, higher global demand, gains from U.S. tax reform, product innovations and Project Readiness.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, ADM has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value and growth investors while momentum investors may want to look elsewhere.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise ADM has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.




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