Will Archer Daniels' Strategic Growth Efforts Drive Stock?

Archer Daniels Midland Company ADM witnesses softness across its Carbohydrate Solutions segment for a while now. Notably, 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 are added concerns.

In first-quarter 2019, the Carbohydrate Solutions segment performed disappointingly as adverse weather in North America impacted results in Starches and Sweeteners, and Bio-products. Also, the Decatur complex was hurt due to a slowdown in corn deliveries.

On the bottom-line front, the company posted earnings miss in the first quarter due to the ongoing China trade dispute and the tough ethanol industry environment apart from adverse winter weather in North America. This marked Archer Daniels’ second straight quarter of negative earnings surprise.

Furthermore, management expects the residual effects of the severe weather conditions in North America to hurt the segment’s second-quarter results by nearly $10-$20 million. Excluding the weather-related impacts, results at the segment will be similar to or slightly below the prior-year quarter’s level.

Consequently, shares of the company have lost 4.4% year to date compared with the industry’s 5.2% decline.

Strategic Endeavors

Archer Daniels’ significant progress on its three strategic pillars including optimize, drive and growth appear 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, guided by the Readiness program. As a part of these efforts, the company has centralized its accounting, finance and other support resources. In 2019, it 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 as well as its commitment to improve returns.

As part of its growth initiatives, Archer Daniels continues to focus on investing in expansion and innovation. Moreover, management announced additional measures to strengthen the company, enhance its quarterly performances and create long-term value. Firstly, Archer Daniels expects to repurpose its corn wet mill in Marshall, MN, so that it can produce higher 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.

Meanwhile, Archer Daniels remains on track with the Readiness goals of fortifying its business and standardizing functions. In fact, the company’s strategic pillars for growth and the aforementioned initiatives are supported by the Readiness program, focused on accelerating and enhancing competitiveness. As of first-quarter 2019, the company has prioritized 650 Readiness initiatives, up from 525 in fourth-quarter 2018. This, in turn, is likely to generate run-rate benefits of about $1.2 billion by the end of 2020. Archer Daniels now estimates these initiatives to contribute about $250-$300 million synergies to the bottom line in 2019 compared with $200-$250 million anticipated earlier.

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

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