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ADM (ADM) Up 5% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Archer Daniels Midland (ADM). Shares have added about 5% 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' Q1 Earnings Beat Estimates, Sales Miss

Archer Daniels reported first-quarter 2020 results, wherein the bottom line beat the Zacks Consensus Estimate while the top line lagged the same. Amid the ongoing COVID-19 crisis, the company remains committed to improving its underperforming categories, drive Readiness and invest primarily in the Nutrition unit.

Adjusted earnings of 64 cents per share rose 39.1% from the year-ago quarter and outpaced the Zacks Consensus Estimate of 53 cents. On a reported basis, the company’s earnings were 69 cents per share, up 68.3% from the prior-year quarter.

Revenues declined 2.2% year over year to $14,970 million and missed the Zacks Consensus Estimate of $15,341 million. Robust sales growth in the Nutrition segment provided some cushion to the top line.

Operational Discussion

Segment-wise, revenues for the Nutrition segment rose 28.4% and 14.7% year over year to $1,471 million and $104 million, respectively. Meanwhile, revenues for Ag Services & Oilseeds, and Carbohydrate Solutions segments were $11,079 million and $2,316 million, reflecting a decline of 4% and 3.6%, respectively.

Moreover, Archer Daniels reported adjusted segment operating profit of $643 million in first-quarter 2020, up 5.8% from the year-ago quarter. On a GAAP basis, the company’s segmental operating profits fell nearly 2% year over year to $599 million.

Adjusted operating profit at Ag Services & Oilseeds improved 1.2% year over year to $422 million. Operating results gained from solid performance in marketing and structured trade finance, which also favored global trade results. Also, a year-over-year increase in origination volumes and margins was driven by sturdy farmer selling in Brazil. On the flip side, high water conditions and other weaknesses in North America hurt results.

The Crushing business witnessed strong margins and solid volumes, which were lower than the record levels seen last year.

Operating results for Refined Products and Other improved year over year, driven by solid margins in biodiesel and refined oils in North America, somewhat offset by lower biodiesel margins in EMEAI. Also, robust peanut shelling results contributed to the growth.

The Carbohydrate Solutions segment’s adjusted operating profit declined 29.2% to $68 million owing to a soft performance by Starches and Sweeteners due to adverse market impacts on forward sales of corn oil. However, management expects this to recover by the end of 2020. Excluding these negative impacts, the metric was higher year over year on the back of an improved operating performance at the Decatur complex, solid performance in wheat milling and enhanced conditions in EMEAI.

At the Nutrition segment, adjusted operating profit of $142 million surged 75.3% from $81 million in the year-ago quarter owing to significant gains in Human and Animal Nutrition units. The Human Nutrition division gained from its diversified portfolio, higher sales in North America and EMEAI flavors, robust performance in alternative proteins, and additional bioactives income. The Animal Nutrition unit retained growth in the quarter under review, driven by a solid performance from Neovia, strong volumes and margins in feed additives as well as sturdy sales in pet care.

Other Financials

Archer Daniels ended the quarter with cash and cash equivalents of $4,734 million, long-term debt, including current maturities, of $9,121 million, and shareholders’ equity of $18,976 million.

During the quarter, the company used $655 million in cash for operating activities. Additionally, it bought back shares of $112 million and paid out dividends of $203 million in the reported quarter. Further, its average trailing four-quarter adjusted return on invested capital (ROIC) was 7.6%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -34% due to these changes.

VGM Scores

At this time, ADM has a nice Growth Score of B, though it is lagging a bit 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, ADM has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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