Why Archer-Daniels-Midland Is a Smart Long-Term Investment

Archer-Daniels-Midland Company (ADM, Financial) recently announced third quarter 2014 total revenue of $18.18 billion, compared to $21.39 billion during the same period last year and below the analyst’s revenue expectation of $21.1 billion.

Archer Daniels reported third quarter 2014 adjusted earnings per share of $0.81, an increase from $0.47 during the same period last year. Net earnings for third quarter of 2014 were $747 million or $1.14 of diluted earnings per common share, compared to net earnings of $476 million or $0.72 of diluted earnings per common share during third quarter of 2013.

What's driving growth

Archer demonstrated excellent third quarter results enabled by solid corn processing coupled with a strategic product mix for better serving the demand and optimizing margins. The agricultural recovery process was further supported by the ongoing enhancement in international merchandising. In addition, Oilseeds Processing illustrated robust third quarter results, enabled by solid demand and its well diversified product portfolio.

Archer also successfully advanced its portfolio management during the quarter. In the third quarter, it entered into a contract to sell its worldwide chocolate business; it signed a deal to acquire Specialty Commodities Incorporated; and successfully acquired WILD Flavors.

Overall, Archer seems to be in a profitable position, strongly dealing with the declining pricing conditions and targeting key acquisitions as well as selling the lesser profitable parts of the business to return to enhanced profitability.

Archer closed its earlier declared buyback of 18 million shares in mid-October which is much ahead of its year ending target. Going forward, Archer estimates to repurchase over 10 million additional shares by the year end, allowed by its robust balance sheet and significant cash flows.

A robust demand and abundant crop availability resulted in considerable crushing of the European rapeseed leading to a major worldwide development in the softseed crushing.

A look at the end markets

In North America, a significant crushing of all the crops resulted in considerable crush margins during the third quarter. However, poor worldwide commodity prices lowered the South American farmer selling in the third quarter leading to limited origination volumes.

In Europe, the lower cost of vegetable oils compared to other energy sources encouraged Archer to enhance the biodiesel capacity utilization and leading to higher margins for the quarter.

By the quarter end, the seasonal fall in the demand for U.S. gasoline propelled greater ethanol inventories and declining industry margins. Archer’s flex capacity allows it to execute varied product mixes coupled with expanding the overall margins. Corn-based ethanol is believed to lead the market with solid exports owing to the low cost.

The starches and sweeteners segment is continuously optimizing its customer mix, plans, product and utilizing the entire capacity to maximize returns.

The Toepfer integration delivered noteworthy enhancements in almost all products and regions.

In transportation, Archer’s barge freight business witnessed nearly 20% expansion in northbound loads and enhanced average freight rates on year-over-year basis with the replenishment of the U.S. Midwest fertilizer and salt inventories.

Finally, Archer is focused on three key areas for driving enhanced shareholder returns viz. reinforcing the business, optimizing its portfolio and expanding the business.

For reinforcing the business, Archer targets on achieving its total cost savings by the year end of approximately $400 million.

For optimizing its portfolio, as mentioned above Archer acquired WILD Flavors, a major supplier of natural ingredients to the beverage and food industries.

For expanding the business, Archer bought Specialty Commodities Incorporated which is a top originator processor and distributor of healthy ingredients comprising of ancient grains, legumes, seeds, fruits and nuts.

Archer plans to close the sale of its worldwide chocolate business to Cargill by the first half of 2015. It is about to close the sale of its South American fertilizer business to Mosaic by this year end. And in the previous week, Archer declared to acquire Harrell Nut Company, a major seller and processor of pecans in the United States.

As a part of its initiatives to enhance the shareholder returns, Archer is building its specialty protein complex in Campo Grande, Brazil; its feed premix plant in Nanjing, China and its fiber and sweetener plants in Tianjin, China. The growth of its Fibersol production capacity in Clinton, Iowa, is planned for mid-2015.

Archer expanded its flour mill at Beech Grove, Indiana, converting it into the third largest flour mill in the United States. Further, its Non-GMO lecithin project in Latur, India and Hamburg, Germany, is expected to start in July and April respectively.

Conclusion

Hence, Archer is following a number of positive moves in order to grow the business. As a result, investors should remain invested in the stock for long-term gains.