ADM’s Corn Processing Profits: Good Sign For Verasun, Pacific Ethanol

Shares of ADM (ADM) got hammered Tuesday as a result of worse than expected quarterly results. It finished Tuesday losing 5.4%. However, even after this loss, ADM still outperforms the S&P 500 YTD by a large margin.

While ADM gained 14.91% since the beginning of the year (15.33% w/ dividend payment), the S&P only gained 4.79%. Investing in ADM still turned out to be profitable, even despite Tuesday’s disappointment.

“We performed well in a challenging quarter,” Patricia A. Woertz, Chairman and CEO Archer Daniels Midland said Tuesday, commenting on last quarter’s performance. While quarterly sales increased by 25%, operating profits only increased by 12.8%, leading to a diminishing of ADM’s already small operating margin. The quarterly operating margin now is below 5%, after being 5.4% last year’s third quarter.

After accounting for non-recurring events of ADM’s divisions, only corn processing, the division engaged among others in the production of ethanol, has been able to increase its operating profits. All other divisions, especially oil seed processing and agricultural services, weren’t able to increase their operating income compared to last year’s quarter.

What are the implications of ADM’s quarterly results? First of all, even though ADM had disappointing results, it is still a solid company with huge growth potential in its ethanol operations. However, the company seems to have some margin problems most likely in the non-corn processing and agricultural services divisions. As we have seen, investing in ethanol seems to be profitable.

Maybe investing in other ethanol producers is a possibility. However, Verasun (VSE) and Pacific Ethanol (PEIX) are very young and focused companies. For someone like me who is more a value oriented investor, investing in these companies is too risky. ADM in comparison to these companies is not strictly focused on ethanol, has a good management and different brand recognition due to its other services.

In my opinion, ADM is still the best ethanol investing pick. However, for speculating on good earnings, VSE and PEIX seem to be interesting, as ADM’s profits in corn processing give an indication that both companies will perform well. Watch out especially for PEIX as its last quarter's performance was adversely influenced by an extraordinary loss and its current estimates are conservative.

Report Date
PEIX: 5/15
VSE: 7/24

Disclosure: The author is a happy and satisfied investor in ADM.

ADM vs. VSE vs. PEIX 1-yr chart: