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Why Archer Daniels' (ADM) Q2 Earnings Are Likely to Fall Y/Y

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Archer Daniels Midland Company (ADM - Free Report) is slated to report second-quarter 2019 results on Aug 1, before market open.

A glimpse of the company’s performance in the trailing four quarters shows that it delivered an average earnings beat of 3.9%. However, Archer Daniels witnessed a negative earnings surprise in each of the preceding two quarters.

Let’s see how things are placed before the upcoming earnings release.

Which Way Are Q2 Estimates Headed?

The Zacks Consensus Estimate for second-quarter earnings is pegged at 63 cents, indicating a significant fall from $1.02 earned in the prior-year quarter. Notably, the consensus mark has witnessed downward revisions in the past 30 days.

For quarterly revenues, the consensus estimate stands at $15.63 billion, suggesting about 8.4% decline from the year-ago quarter’s reported number.

Factors Likely to Impact Q2

Archer Daniels’ Carbohydrate Solutions segment has been putting up a dismal show for a while now, which is likely to persist in the to-be-reported quarter. In first-quarter 2019, revenues at this segment were hurt by adverse weather in North America that impacted results for Starches and Sweeteners as well as Bio-products. Management expects the residual effects of this severe weather to mar the segment’s second-quarter results by nearly $10-$20 million.

Reduced production volumes, higher manufacturing and logistics costs along with lower ethanol margins and volumes further continued to weigh on the segment’s performance. Impacts of weather were most significantly felt at the corn wet and dry mills in Columbus, NE, while the Decatur complex was hurt by a slowdown in corn deliveries. Starches and Sweeteners were impacted by weak European sweetener industry volumes and margins as well as escalated manufacturing expenses at the Decatur complex and lower margins in flour milling.

Excluding the weather-related impacts, the Carbohydrate Solutions segment’s results will be similar to or slightly below the year-ago quarter’s level. This, along with the ongoing China trade dispute and the tough ethanol industry environment hurt Archer Daniels’ bottom line in the first quarter. The top line also declined year over year due to dismal performance across all segments, except Nutrition.

Nevertheless, Archer Daniels’ smooth progress on its three strategic pillars — optimize the core, drive efficiency and grow strategically — as well as focus on cost savings and Project Readiness appears encouraging. It also remains focused on investing in expansion and innovation.

Backed by the Readiness program, management is focused on company-wide process simplification initiatives. In 2019, Archer Daniels expects to reduce capital spending by 10% to $800-$900 million through the Readiness-based benefits. Further, the Readiness initiatives are expected to contribute about $250-$300 million synergies to the bottom line this year.

A Glance at the Zacks Model

According to the Zacks Model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if they have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Archer Daniels’ Earnings ESP of -1.20% and a Zacks Rank #4 make surprise prediction difficult.

Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to beat estimates:

The Estee Lauder Companies Inc. (EL - Free Report) has an Earnings ESP of +7.80% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Church & Dwight Co., Inc. (CHD - Free Report) has an Earnings ESP of +1.22% and a Zacks Rank #2.

Monster Beverage Corporation (MNST - Free Report) has an Earnings ESP of +1.12% and a Zacks Rank #3.

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