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The Commodity King Is Back

By Neil DeFalco

Tickers in this Article: ADM

The market has taken a royal beating since the start of 2008, and systematic risk has been very hard to avoid. However, Archer Daniels Midland (NYSE:ADM) seems to have covered all of its losses since the start of the year and is staging a nice comeback.

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What Does Archer Daniels Midland Do?
ADM is an agricultural conglomerate based in the United States that operates more than 270 plants worldwide. Its products includes oils and meal from cottonseed, soybeans, sunflower seeds, canola, peanuts and flaxseed, in addition to several corn products which include corn germ, syrup, glucose, dextrose and ethyl alcohol. ADM also dabbles in the transportation services and agricultural storage business.

Strong Sales and Rallying Revenues
Second-quarter profit rose 7% year-over-year according to the company press release from February 4. This stemmed from higher earnings on oilseed processing and rising demand for feed grains.

Profits for the quarter jumped to $473 million (73 cents per share) from $441 million (67 cents per share) in the same quarter a year earlier. Revenue also rose 50% to $16.5 billion from $11 billion last year. Oilseed processing operating profit increased 14% to $219 million on strong global demand for protein and oil. Finally, profit from ADM's agricultural service business spiked to $315 million, representing a 240% increase from the same quarter last year! (For more on breaking down company operations, see The Importance Of Segment Data.)

Earnings and Ethanol Trouble
Even though Archer Daniels Midland posted significant increases in the majority of its business operations, the company actually failed to meet analyst earnings expectations. Analysts polled by Thomson Financial had forecast a profit of 74 cents per share and the actual EPS number came in at 73 cents. As a result, the shares fell about 3% on the earnings news.

This shortfall was largely caused by declining margins in its ethanol business. ADM is the largest ethanol producer in the U.S. and showed strains from rising corn prices and falling ethanol sale prices - corn processing operating profit fell 18% to $275 million. The price of corn, already inflated from demand from ethanol and food producers, has really spiked as of late. A bushel of corn, which traded as low as $3.09 last summer, is now trading in the $5 range. (To learn more about ethanol and alternative fuel, see The Biofuels Debate Heats Up.)

The Bottom Line
Archer Daniels Midland is doing the right things to position its business for increased profitability. It is trying to diversify its business operations enough that it will be extremely difficult for this agricultural giant to be affected too much by one segment, which happens to be ADM’s corn processing division at the moment.

Also, the Fed just cut interest rates again and businesses across the board will be seeing the benefits over the next year. ADM's trailing P/E ratio is hovering around 12 at the moment - compared to an industry average of close to 20. With revenue jumping 50% year over year, Archer Daniels Midland is undervalued at the moment and I'd say this stock is poised to pop.

By Neil DeFalco

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