Archer-Daniels-Midland (ADM, Financial), one of the largest corn processors, recently posted financial results for the third quarter of 2014 that topped the consensus estimates on earnings. It witnessed strong demand in its ethanol business despite sluggish energy prices. Also, its cost containment program made a strong contribution to its performance during the quarter. Looking ahead, the company is seeing strong momentum in its corn-based ethanol business despite sliding energy prices that should drive its profit in the future.
Archer-Daniels-Midland, for the third quarter, reported revenue of $18.12 billion, a slump of 15.3% as compared to $21.3 billion in the same quarter a year earlier. Its net profit for the quarter rose 57% to $747 million or earnings of $0.81 per share as against $476 million or earnings of $0.47 per share in the corresponding period last year. The consensus was estimating earnings of $0.73 per share on the revenue of $21.1 billion for the quarter.
Strong agriculture demand
According to one of the report by OECD-FAO , the outlook for agriculture food is relatively stronger this year as compared to last year. However it is growing at a sluggish rate as compared to the high growth rate in the past. Also, the biodiesel and world ethanol prices have dropped marginally from their historical pick level in 2011, in spite of strong supply of biodiesel and ethanol. This however raises few concerns for Archer due to fragile ethanol prices.
Nevertheless, the company should benefit from the strong agriculture outlook this year. Archer is strategically engaged creating product mix strategy that can fetch great results amidst high demand for its ethanol business and low corn prices. The product mix strategy has helped the company to display a massive 57% jump in its profit in the reported quarter. Moreover, it should benefit from steady sales for its biofuels to its gasoline blenders, leading a rise in the export. The total industry export in the United States is expected to range from 800 million gallons to one billion gallons in 2015. This suggests that the company should gain from its ethanol business in the future.
In addition, its corn-based ethanol business is helping the company to contain its costs by a great extent as it is the lowest-cost obtaining enhancer across the market. Also, the company is expected to have better sales for its ethanol business across the world. It is seeing rising demand for its ethanol business in countries such as Mexico, Canada, the Middle East and Asia. Besides, it has controlled its production to better align it with the sluggish oil prices across the world. This should help the company to better serve the rising demand and improve its margins going forward.
Potential acquisition to gear-up its growth
Archer is busy in various strategic initiatives such as consolidation its business, managing portfolio and developing its business. Archer-Daniels-Midland has recently acquired WILD Flavors, which supplies natural ingredients to the food and beverage industries across the world. This acquisition should help the company to design superior ingredients for various products such as protein drinks, nut bars, and others that has comparatively larger profitability than other trading grains. In addition, the company is expects recovery in its grain-trading division that should enhance its results going forward. It is predominantly engaged buying crops from farmers and grain elevators and sells them to food companies across the world.
Archer is also planning to expand its specialty ingredients portfolio by purchasing Specialty Commodities Incorporated, a leading originator processor and distributor company. It processes and distributes healthy ingredients such as nuts, fruits, seeds, legumes and ancient grains. Besides, it is also planning to acquire Harrell Nut Company in the U.S. that remains one of the largest sellers and processor of pecans in the United States.
Conclusion
Archer looks great with these acquisitions and positive agriculture outlook. The analysts have estimated CAGR of 11.40% for the next five years that demonstrate great growth prospects for the company in the long-run. Also, its short-term returns are very attractive with CAGR of 31.30% this year and 16.70% by next year respectively. The stock is trading at the trailing P/E of 17.79 and forward P/E of 14.50 that indicate reasonable valuation for the company that has a lot of rooms to expand in the future. Also, its PEG ratio of 1.49 continues to support its growth over the next five years. Its balance sheet carries total cash of $4.89 billion, while its total debt stands at $5.54 billion. It has operating cash flow of $4.79 billion and leverage free cash flow of $3.75 billion.
