On February 5, Archer-Daniels-Midland (ADM), the world's largest corn processor, reported fiscal second-quarter (or calendar Q4) profit and revenue above estimates. ADM's strength was largely founded upon record operational capacity within its U.S. soybean operations.
Archer-Daniels-Midland reported earnings per share, excluding inventory gains and other items, of $0.60 for the holiday quarter, beating most Wall Street estimates by about two cents. Revenue came in strong, at about $24.9 billion, which was nearly seven percent better than the prior year, or about $2 billion better than expected. ADM's net income increased to $510 million, or $0.77 per share, in the quarter from $80 million, or $0.12 cents, the prior year. The primary difference was operating profit from ADM's oilseeds segment, which doubled to $411 million.
ADM continued to increase its grinding and production of refined soybean products, from meal to oil, in response to ever growing global demand for those products. Demand growth has been robust in both the U.S. and Asia. Due to increased commodity prices, the costs of these products have also increased. Prices for soybeans increased by about 75 percent in 2012, with much of the increase coming from a U.S. draught and increased corn prices that increased soy demand. ADM sells both corn and soy products.
ADM also saw strong profit growth from its sweeteners and starches segment, where higher corn costs and continued demand growth supported increased selling prices. ADM indicated that high-fructose corn syrup prices increased 11.5 percent compared to the same quarter a year earlier, indicating processors have successfully passed on at least some of the higher corn costs paid. Corn processing created $3 million in profit, compared with a loss of $129 million a year earlier.
Some of ADM's strong performance was also based its agricultural services business, where operating profit increased 32 percent to $317 million, including a $62 million gain from ADM's stake in Graincorp, an Australian grain handler for which ADM made a hostile bid and subsequent increased offer last quarter. ADM generates most of its sales domestically and has the majority of its assets in the U.S., but the company is expanding internationally. Included in this expansion, ADM increased its stake in Graincorp to 19.9 percent in December bid $2.9 billion for the company.
ADM indicated on its conference call that the deal will not proceed and that the two companies have not continued conversations on the matter. ADM had increased its stake in Graincorp just prior to ADM's initial bid, and Graincorp's board may feel that ADM was then misleading about its intentions. In any event, ADM shares reacted poorly to the hostile bid, and it is likely that the cessation of ADM's pursuit of Graincorp may result in some share appreciation.
Moreover, many had anticipated that ADM would increase its dividend at the end of 2012 and that the proposed takeover made such impossible. Therefore, the end of the pursuit of Graincorp may mean that ADM is in better condition to shortly announce an increased dividend. ADM was a dividend aristocrat going into 2012, meaning that it had a history of increasing its dividend every fiscal year for at least 25 years. Last year, the company realigned its financial reporting to coincide with the calendar year. Last quarter was part of an abbreviated and transitional half-year within which there was no dividend increase.
While ADM did not particularize its coming growth endeavors, the company did indicate it will resume its share buyback program in the first quarter and that it will allocate $1 billion towards capital expenditures in 2013. Given that ADM was prepared to pay about $2.24 billion for Graincorp, this indicates that ADM may have some money left over to allocate towards increasing the dividend, unless the additional $1.24 billion will go towards ADM's buyback program. If such were the case, that would equate to a buyback of about 6.4 percent of ADM's equity, which would be significant and in contrast with the company's indication during its conference call that its buyback will be modest.
ADM may also pursue other acquisitions. It has been anticipated that large agricultural companies like ADM and also Bunge (BG) will acquire global farmland, and it is possible that these industries will look for such land in South America. Companies that could benefit from such a trend would include South American agricultural companies such as Cresud Sociedad (CRESY), Adecoagro (AGRO) and Brasilagro Companhia Brasileira de Propriedades Agr (LND).
These companies and the plots of farmland they own could become key acquisition targets by large global enterprises as global demand increases and concerns over draughts and other issues exist within the U.S. and other crucial growing regions. Nonetheless, many potential buyers may remain wary of expanding into South America due to concerns that would include political uncertainty. The potential for socialized nationalization of corporate entities, and particularly of foreign-owned domestic assets, may deem some nations too risky for an ownership interest.
ADM appears poised to perform well in 2013, as the company continues to benefit from increased product costs as well as its soon to be initiated buyback. If ADM announced an increased dividend, that would also likely fortify share valuations in the near term. Little other news is likely to affect the business in the near term, though ADM does have potential fallout to be felt from any government spending restrictions that may arise through the pending debt ceiling issue, including subsidies on agricultural products and enthanol. Nonetheless, these practices are ingrained into American sociery and their being targeted in any cutbacks appears unlikely.
Disclosure: I am long ADM.