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Why Is ADM (ADM) Down 5.6% 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 lost about 5.6% in that time frame, underperforming the S&P 500.

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

Archer Daniels Q3 Earnings Beat, Sales Miss Estimates

Archer Daniels reported mixed third-quarter 2018 results, wherein the bottom line outpaced the Zacks Consensus Estimate while the top line missed. However, both earnings and sales improved year over year. Notably, this marked the company’s fourth straight positive earnings surprise, with a sales miss after two consecutive beats.

Q3 Highlights

Archer Daniels’ third-quarter adjusted earnings of 92 cents per share rose more than 100% from 45 cents earned in the year-ago quarter. Further, it outpaced the Zacks Consensus Estimate of 80 cents.

On a reported basis, the company’s earnings were 94 cents per share, significantly up from 34 cents in the prior-year quarter.

Revenues totaled $15,800 million, up 6.6% year over year. But, it missed the Zacks Consensus Estimate of $15,924 million. The upside was driven by robust growth strategies, along with solid sales across the company’s all major segments except for the Carbohydrate Solutions division.

Going by segments, quarterly revenues at Origination, Oilseeds and Nutrition were up 6.3%, 11.8%, and 4.2% to $5,850 million, $6,410 million, and $922 million, respectively. However, revenues at Carbohydrate Solutions and Other segments fell 2.8% and 14.3% to $2,534 million and $84 million, respectively.

Operational Discussion

Archer Daniels reported adjusted segment operating profit of $861 million in third-quarter 2018, up 59.1% from the year-ago quarter. On a GAAP basis, the company’s segment operating profit surged 81.6% year over year to $881 million.

On a segmental adjusted basis, adjusted operating profit at the Oilseeds segment rose significantly year over year to $349 million. The upside can be attributed to solid Crushing and Origination results. Moreover, this solid performance was supported by robust soybean crush volume, mainly in North America, EMEA and South America.

Moreover, the company witnessed significant growth in softseeds performance year over year, particularly in EMEA. Further, robust Wilmar results in Asia aided growth. Furthermore, edible oils remained sturdy in the reported quarter. However, growth was somewhat offset, with soft results at Refining, Packaging, Biodiesel and Other categories. Moreover, peanut shelling margins were down, attributable to higher peanut inventories and tough market conditions.

Further, adjusted operating profit at the Origination segment was $129 million, significantly up from $39 million in the year-ago quarter. This improvement was driven by gains from solid Merchandising and Handling results, as well as higher volume and margins in North America, amid a volatile price backdrop. Moreover, Global Trade’s effective utilization of the company’s network of origination assets beside continued expansion of robust marketing volume and margins aided the segment’s performance. Additionally, transportation results were more than double due to higher volume and margins in ARTCO.

However, Nutrition segment’s adjusted operating profit dipped 1.5% to $67 million as robust WFSI results were offset by soft performance at Animal Nutrition. In fact, the WFSI business delivered 10% growth in constant currency, with above 30% rise in operating profit. Furthermore, its EMEA and North America results remained sturdy on higher volume and portfolio mix. Emulsifiers and proteins also performed impressively in Specialty Ingredients. Further, the Health & Wellness business, with the inclusion of Protexin, performed well. However, lower lysine production volume, coupled with higher manufacturing costs and lower premix margins, hurt Animal Nutrition’s performance.

Carbohydrate Solutions segment’s adjusted operating profit declined 4% to $288 million. The downside can be attributed to elevated input and manufacturing expenses, which hurt North American liquid sweeteners. Bioproducts results were also down as gains from impressive ethanol risk management, and beverage and industrial alcohols were compensated by a weak ethanol industry margin backdrop. Issues at Decatur plant further impacted results in North America. However, this was offset by robust results at Starches and Sweeteners. Moreover, EMEA sweeteners benefited from latest acquisitions. Flour milling remained good as well.

Financials

Archer Daniels ended the quarter with cash and cash equivalents of $915 million, long-term debt, including current maturities of $7,320 million, and shareholders’ equity of $19,000 million.

In the nine months of 2018, the company generated negative cash flows of $3,680 million from operating activities. Additionally, the company paid dividends worth $568 million to shareholders in the nine months of 2018.

Looking Ahead

Management remains impressed with its quarterly results, which benefited from its initiatives and cost-saving efforts. Moreover, Archer Daniels remains focused on five major platforms — animal nutrition, bioactives, carbohydrates, human nutrition and taste — along with geographic regions to drive growth.

The company remains focused on optimizing its core business and making investments to boost efficiency. Management remains optimistic about delivering impressive results, 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?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted -7.11% due to these changes.

VGM Scores

Currently, ADM has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Outlook

ADM has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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