Archer Daniels Earnings Preview

Aug. 1.11 | About: Archer Daniels (ADM)

Archer Daniels Midland Company (NYSE:ADM) is one of the leading food processing companies in the world. The company is scheduled to report its fourth-quarter 2011 financial results before the opening bell on August 2, 2011.

The current Zacks Consensus Estimates for the quarter is earnings of 84 cents a share. For the quarter under review, revenue is expected at $20,484.0 million, according to the Zacks Consensus Estimate.

Third-Quarter 2011 Summary

Archer Daniels reported robust third-quarter 2011 results. Net income for the reported quarter was $578.0 million or 86 cents per share compared with $421.0 million or 65 cents per share in the year-ago quarter. Quarterly earnings also outpaced the Zacks Consensus Estimate by a penny.

The robust quarterly result was primarily attributable to increased segmental profit, partially offset by negative discrepancy from changes in Last-In-First-Out (LIFO) inventory valuations caused by higher agricultural commodity prices.

Archer Daniels' quarterly net sales climbed 32.6% year over year to $20,077.0 million, beating the Zacks Consensus Estimate of $17,279.0 million. The growth in net sales was mainly attributable to a robust jump of 37.6% in Agricultural Services to $9,340.0 million, a rise of 30.6% in Oilseeds Processing revenues to $6,642.0 million and an increase of 28.2% in Corn Processing revenues to $2,513.0 million.

Fourth-Quarter 2011 Zacks Consensus

The analyst covered by Zacks expects Archer Daniels Midland to post fourth-quarter 2011 earnings of 84 cents a share, which is higher than earnings of 69 cents delivered in the prior-year quarter. The current Zacks Consensus Estimate ranges between earnings of 74 cents and $1.00 a share.

Zacks Agreement & Magnitude

Of the 12 analysts following the stock, only one analyst revisited and downgraded its estimate, over the last 7 days for the fourth quarter of fiscal 2011. Two out of three analysts revisiting their estimates have downgraded and only one has upgraded it over the last 30 days.

Mixed Earnings Surprise History

With respect to earnings surprises, Archer Daniels Midland has thrice topped the Zacks Consensus Estimate over the last four quarters in the range of approximately negative 28.0% to positive 48.1%. The average remained at approximately 14.8%. This suggests that Archer Daniels has beaten the Zacks Consensus Estimate by an average of 14.8% in the trailing four quarters.

Our View

Archer Daniels Midland is in the midst of a brisk expansion strategy, which includes expanding crushing capacities in North America, and fertilizer blending and biodiesel capacities in South America. Moreover, in Europe, the company has acquired processing facilities in Czech Republic and Germany.

These initiatives offer a strong upside potential to the company. Moreover, the world is facing a tight supply of milling-quality wheat resulting from continued reductions in the production of Australian wheat crop and depletion in supply from Europe.

The U.S. is becoming the best source for milling quality wheat due to a variety of buyers in North Africa and Middle East. Archer Daniels Midland is expected to benefit from this as it has a substantial quantity of milling wheat in storage.

In addition, Archer Daniels Midland is one of the leading players in the global food processing industry and commands a massive network of more than 560 processing and sourcing facilities and 27,000 vehicles operating across the Americas, Europe and Asia for transportation of agricultural commodities. This provides a strong competitive advantage to the company and strengthens its well-established position in the market.

However, Archer Daniels Midland's operating performance is based on the availability and price of agricultural commodities, which in turn, is dependent on certain factors, such as weather, plantings, government programs and policies, changes in global demand and standards of living. Therefore, the company is prone to significant risks from adverse fluctuations due to these factors.

Furthermore, agricultural commodity-based business is a capital-intensive business and hence requires sufficient liquidity and financial flexibility to fund the operating and capital requirements. For this, Archer Daniels Midland relies on cash generated from operations and external financing. Limitations on access to external financing could negatively affect the company's operating results.

Archer Daniels Midland, which competes with Bunge Limited (NYSE:BG) and Corn Products International Inc. (CPO) currently has a Zacks #4 Rank, implying a short-term Sell rating on the stock. Besides, the company retains a long-term Neutral recommendation.