Drought Across The U.S. Crushes ADM's Margins

| About: Archer Daniels (ADM)

Agricultural processor and manufacturer Archer Daniels Midland (ADM) reported weaker than expected earnings for its fiscal year 2012 fourth quarter Tuesday. Revenue fell almost 1% year-over-year during the quarter to $22.7 billion, which was about $800 million higher than consensus expectations. However, the firm saw earnings tumble 45% to $0.38 per share, about $0.23 shy of what the Street expected. Margins were down significantly year-over-year, and expected weakness from crops harvested in the firm's first quarter could negatively affect profits going forward. We think shares are fairly valued at this time.

During the quarter, profitability suffered throughout every segment. Corn processing profit fell 36% year-over-year driven by negative ethanol margins. COO Juan Luciano remarked, "Margins continue to be extremely volatile because as the industry is trying to reduce inventories, corn is moving at the same time." With gasoline demand falling due to high prices and improved fuel efficiency from new vehicles entering the fleet, we do not expect a sudden surge in demand for ethanol any time soon.

Profits in the Agricultural Services segment fell 64% to $123 million due to significantly lower US exports resulting from diminished supply. Oilseeds operating profit also fell, though its 26% decline to $331 million was less crippling than other segments. The firm did report favorable results in South America; however, soybean, like corn, supplies will likely be constrained due to the poor growing conditions in the United States.

We're not crazy about ADM's business model, as its margins tend to be highly volatile as a result of commodity costs, which are the firm's largest input. The firm scores a 4 on our Valuentum Buying Index (our stock-selection methodology), so we wouldn't be surprised to see shares decline from here. However, we continue to believe the firm is fairly valued, though we aren't at all interested at this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.