Archer Daniels Down 12% In A Year: Can Efforts Revive Stock?

Shares of Archer Daniels Midland Company (NYSE:ADM) have lost 11.9% in the past year, primarily due to softness across its Carbohydrate Solutions segment for a while now. Decline in production volumes, higher manufacturing and logistics costs as well as lower ethanol margins and volumes are hurting the segment’s performance. Issues at the Decatur complex remain an added concern. Meanwhile, the industry has registered a decline of 14.7% in the same period.

In first-quarter 2019, revenues at the Carbohydrate Solutions segment fell 7.6% owing to adverse weather in North America that impacted results in Starches and Sweeteners as well as Bio-products. While severe weather conditions significantly impacted the corn wet and dry mills in Columbus, NE, the Decatur complex was hurt by slowdown in corn deliveries. Weather-related impacts affected the segment’s revenues by nearly $30 million.

Meanwhile, Starches and Sweeteners were impacted by weak European sweetener industry volumes and margins as well as escalated manufacturing expenses at the Decatur complex and lower margins in flour milling. Management expects the residual effects of severe weather to hurt the segment’s results by nearly $10-$20 million in the second quarter. Excluding the weather-related impacts, quarterly results of the segment will be similar to or slightly below the second-quarter 2018 level.

Consequently, Archer Daniels reported dismal first-quarter 2019 earnings, which fell year over year and missed the Zacks Consensus Estimate for the second straight time. Additionally, results were negatively impacted by the ongoing China trade dispute and the tough ethanol industry environment, which hurt margins and lowered opportunities. Also, the top line declined year over year due to dismal performance across all segments, except Nutrition.

Is a Turnaround on the Cards?

While the aforementioned factors make us apprehensive, Archer Daniels’ significant progress on its three strategic pillars including optimize, drive and growth look encouraging. Progress on the optimize pillar is anchored by the rationalizing of its peanut and tree null selling footprint in the United States. Further, the company plans to close two of its century-old wheat flour mills in the Midwest, following the opening of a state-of-the-art facility in Mendota, IL, in the second half of 2019.

In a bid to optimize its U.S. origination footprint, the company sold three grain elevators in Kansas, Colorado and Oklahoma. The drive pillar is focused on company-wide process simplification initiatives backed by the Readiness program. In 2019, Archer Daniels expects to reduce capital spending by 10% to $800-$900 million through the Readiness-based benefits to capital prioritization, project evaluation and project execution processes. Further, the Readiness initiatives are expected to contribute about $250-$300 million synergies to the bottom line this year.

Archer Daniels also focuses on investing in expansion and innovation. In addition, management has announced additional measures to support the company, enhance its quarterly performances and create long-term value. Firstly, the company expects to repurpose its corn wet mill in Marshall, MN, so that it can produce increased volumes of food and starches. Secondly, it is creating an ethanol subsidiary, consisting of three ethanol dry mills. Lastly, the company is taking actions to boost agility, growth and customer service. These measures include organizational changes to standardize business processes, accelerate planned synergies from buyouts, and voluntary early retirement of associates in the United States and Canada.

Backed by these strategic endeavors, this Zacks Rank #3 (Hold) stock is likely to witness growth in the coming days.

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