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Archer Daniels Rises 21% in a Year: Will the Rally Continue?

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Archer Daniels Midland Company (ADM - Free Report) has been gaining momentum on the back of its well-chalked strategies, including portfolio management, cost savings and the Readiness program. Furthermore, the company remains confident about ending 2018 on a solid note, thanks to improving market conditions, higher global demand, gains from U.S. tax reform and product innovations.

In a year’s time, shares of this Zacks Rank #2 (Buy) company have rallied 21%, significantly outperforming the industry’s 7.6% growth. Also, the company’s earnings outpaced the estimates in the trailing four quarters, with an average of 26.9%. On the revenue front, Archer Daniels exceeded the estimates in two of the last three quarters.

Although the company’s top line lagged estimates in third-quarter 2018, sales benefited from growth strategies and solid sales across Archer Daniels’ all major segments, except the Carbohydrate Solutions division. In 2018, the Origination, Oilseeds and Nutrition segments are expected to deliver impressive performance. Moreover, the company remains focused on five major platforms — animal nutrition, health & wellness, carbohydrates, human nutrition and taste — to drive growth.

For 2018 and 2019, the Zacks Consensus Estimate of $3.53 and $3.62 moved north by 10 cents and 9 cents, respectively, in the past 30 days. Let’s delve deep.

Cost Savings & Project Readiness Bode Well

Archer Daniels is focused on strengthening its business through increased cost savings — a key component of its long-term strategy. It 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. Meanwhile, the company reached the targeted $200 million operational cost savings for the current year, generating more than $200 million on a run-rate basis in the nine months of 2018.

Additionally, the company has long been enhancing operational efficiency at its production and supply chain networks to curtail costs. Also, Archer Daniels has been on track with the business transformation, under its 1ADM program, which forms an integral part of Project Readiness. The company has progressed well through the first two phases of Readiness and is on track with the implementation phase. It expects this program to help management with a more coordinated approach toward driving business improvement, standardizing functions and enriching consumers’ experience.

Portfolio Management & Capital Strategy Hold Promise

Archer Daniels is undertaking strategic initiatives to manage its business portfolio, which are expected to help in realizing value and invest the same in best possible resources to enhance returns. In this regard, recent acquisitions of Rodelle and Protexin are worth mentioning. Management also remains on track to close the France-based Neovia buyout, which should aid in boosting animal nutrition solutions for the feed industry. Further, the company has announced the GrainBridge joint venture to strengthen its Origination business. In the Oilseeds business, the company is on track to acquire certain assets of Algar Agro, mainly refining and packaging facilities in Brazil.

Simultaneously, the company has undertaken few divestitures including offloading the Crop Risk Services insurance operations to Validus and divesting its oilseeds operations in Bolivia. These acquisitions and divestitures are expected to strengthen the company’s portfolio besides improving its knowledge and driving higher returns.

Apart from making investments to develop its business, Archer Daniels makes dividend payouts to enhance shareholder returns. Evidently, the company paid dividends of $568 million in the nine months of 2018. Also, management declared quarterly dividend of 33.5 cents per share payable Dec 14, 2018.

Wrapping Up

We believe that Archer Daniels will continue performing well backed by the aforementioned strategic factors. Moreover, the company has a VGM Score of B that highlights its inherent potential.

Interested in Consumer Staples Space? Check These

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