CPO Ingredion, Inc.

Decatur, Illinois based Archer Daniels Midland Company (ADM), one of the leading food processing companies in the world, recently posted its third-quarter 2011 results. The street analysts had nearly a week to ponder on the news. In the paragraphs that follow, we will cover the recent earnings announcement, subsequent analysts' estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.

Quarterly Review

On May 03, 2011, 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 increased 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.

(Read our full coverage on this earnings report: Archer Daniels Beats by a Penny)

Agreement of Analysts

Estimate revision trends for the upcoming fourth-quarter 2011 and first-quarter 2012 portrayed negative sentiments among most of the analysts covering the stock. Over the last 7 days, 6 out of 12 analysts following the stock revisited their estimates, of which 2 upgraded and 4 downgraded their estimates for the fourth quarter of 2011. Moreover, for first-quarter 2012, only one analyst has lowered the estimate in the last 7 days.

In addition, 4 analysts revisited their estimates for fiscal 2011 and all have adjusted it in downward direction in the last 7 days. Similarly, for fiscal 2012, 7 analysts revisited their estimates, of which only one analyst has upgraded and 6 have downgraded in the last 7 days.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for Archer Daniels depicts a pessimistic outlook for fourth-quarter 2011 and first-quarter 2012 and fiscals 2011 and 2012. Over the last 7 days, estimates for fourth-quarter 2011 and first-quarter 2012 have been decreased by 4 and 6 cents, respectively. While for fiscals 2011 and 2012, estimates have been slashed by 4 and 8 cents, respectively.

Our Recommendation

Archer Daniels 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 tight supply of milling-quality wheat due to 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 is expected to benefit from this as it has a substantial quantity of milling wheat in storage. In addition, Archer Daniels 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' operating performance is based on the availability and price of agricultural commodities, which in turn, is dependent on 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 in 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 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, which competes with Bunge Limited (BG) and Corn Products International Inc. (CPO), currently has a Zacks #3 Rank, implying a short-term 'Hold' rating on the stock. Besides, the company retains a long-term 'Neutral' recommendation.

 
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