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Archer Daniels Rides on Solid Cost Saving & Readiness Efforts

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Archer Daniels Midland Company (ADM - Free Report) has been in investors’ good books, courtesy of various strategic efforts such as cost-savings plan, Project Readiness and reinforcing business portfolio. Additionally, the company’s earnings surpassed estimates for the fourth straight time, when it reported third-quarter 2018 results. Management remains confident about continuing this stellar performance ahead driven by improving market conditions, higher global demand, gains from U.S. tax reform and aforementioned initiatives.

All these positives are well reflected in the company’s share price performance in the past year. Shares of this Zacks Rank #1 (Strong Buy) company have gained 3.5% against the industry’s and S&P 500 index’s 7% and 5.6% decline, respectively.

Let’s Delve Deeper

Archer Daniels remains focused on strengthening its business through increased cost savings, which is a key component of its long-term strategy. Management targets $550 million in additional run rate cost savings over the next few years, including cost savings of $350 million from operational excellence and process enhancements, and about $200 million in incremental purchasing savings.

Remarkably, the company has already reached its targeted $200-million operational cost savings plan for 2018, with more than $200 million in run-rate savings generated in the first nine months of the year. It also focuses on cost synergy activities by addressing redundancies and removing overlapping corporate SG&A.

Moreover, Archer Daniels has long been enhancing the operational efficiency at its production and supply chain networks to minimize costs. The company is on track with business transformation under its 1ADM program, which is an integral part of Project Readiness. Notably, the company has progressed well through the first two phases of Readiness and is currently in the implementation phase. This program is expected to help management have a more coordinated approach toward driving business improvement, standardizing functions and enriching consumers’ experience. Further, the company plans to allocate resources efficiently on more mature businesses and make prudent business investments.

Archer Daniels’ commitment toward managing its business portfolio via acquisitions and divestitures is another positive. Recently, it agreed to buy Florida Chemical Company (“FCC”) to enhance its nutrition portfolio, with citrus ingredients and flavors. FCC is part of Flotek Industries, Inc. (FTK - Free Report) — the leading developer and supplier of chemistry and services to the oil and gas industry. As citrus is among the fast-growing flavors, we believe that Archer Daniels’ portfolio is likely to benefit from FCC’s rich heritage and expertise apart from its huge customer base.

Furthermore, the company has acquired Rodelle and Protexin. It is also on track to close the buyout of France-based Neovia, which should aid in boosting animal nutrition solutions for the feed industry.

In the Origination business, Archer Daniels announced the GrainBridge joint venture. Additionally, the company is likely to acquire certain assets of Algar Agro, mainly refining and packaging facilities in Brazil. Meanwhile, it completed the divestiture of its oilseeds operations in Bolivia.

Moving ahead, Archer Daniels remains focused on five major platforms, animal nutrition, health & wellness, carbohydrates, human nutrition, and taste to drive growth.

Bottom Line

We expect Archer Daniels to continue with this momentum backed by its ongoing strategic efforts. Moreover, a VGM Score of B for the company demonstrates its inherent potential.

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