Archer Daniels Midland Company

Transcription

1 February 26, 2015 Archer Daniels Midland Company (ADM-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 12/04/2014 Current Price (02/25/15) $48.10 Target Price $ Week High $ Week Low $39.88 One-Year Return (%) Beta 0.85 Average Daily Volume (sh) 4,144,677 Shares Outstanding (mil) 634 Market Capitalization ($mil) $30,509 Short Interest Ratio (days) 3.15 Institutional Ownership (%) 76 Insider Ownership (%) 3 SUMMARY In fourth-quarter 2014, Archer-Daniels posted better-than-expected earnings backed by strong ethanol demand due to reduced gasoline prices. Archer-Daniels consistent focus on enhancing its processing capabilities and global footprint through strategic acquisitions bode well for future growth. Moreover, we are encouraged by its strong cash flow generation ability and capital allocation strategies which allow it to invest in the development of business and use the excess cash to enhance shareholder returns. However, significant presence in the international market exposes the company to unfavorable foreign currency translations and economic and political instability. The company also remains sensitive to rising commodity prices. Hence, we retain our long-term Neutral recommendation on the stock. Risk Level * Below Avg., Type of Stock Large-Value Industry Agri Operations Zacks Industry Rank * 110 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) Annual Cash Dividend $1.12 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 7.0 Earnings Per Share (%) -3.2 Dividend (%) 11.1 using TTM EPS 15.0 using 2015 Estimate 14.1 using 2016 Estimate ,727 A 22,541 A 21,393 A 24,143 A 89,804 A ,696 A 21,494 A 18,117 A 20,894 A 81,201 A ,468 E 22,238 E 19,134 E 22,743 E 85,583 E ,298 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.48 A $0.46 A $0.46 A $0.95 A $2.33 A 2014 $0.55 A $0.77 A $0.81 A $1.00 A $3.20 A 2015 $0.81 E $0.79 E $0.86 E $0.95 E $3.41 E 2016 $3.58 E Zacks Rank *: Short Term 1 3 months outlook 3 - Hold Projected EPS Growth - Next 5 Years % 9 * Definition / Disclosure on last page Note: Qtly. fig. may not add up to annual fig. due to rounding off 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Archer-Daniels-Midland Company is one of the leading food processing companies in the world. The company processes oilseeds, corn, wheat, cocoa and other feedstuffs, and is one of the leading manufacturers of vegetable oil, protein meal, corn sweeteners, flour, biodiesel, ethanol, and other valueadded food and feed ingredients. Archer-Daniels also has a worldwide grain elevator and transportation network for procurement, storage, cleansing and transportation of agricultural commodities. The IL-based company reports its operating results under four segments: The Agricultural Services division (46% of total revenue for FY14) includes operations related to the company s grain elevator and transportation network in the U.S. to buy, store, clean and transport agricultural commodities and resell them primarily as animal feed and raw materials for the agricultural processing industry. The Oilseeds processing division (39% of total revenue) is engaged in the processing of soybeans, cottonseed, sunflower seeds, canola, rapeseed, peanuts and flaxseed into vegetable oils and protein meals in North America, Europe, South America and Asia, principally for food and feed industries. The Corn processing segment (14% of total revenue) produces a number of products for the food and beverage industries, including syrup, starch, glucose, dextrose, and sweeteners. It is also engaged in the production of ethanol, amino acid, citric acid, lactic acid, lactates, sorbitol and xanthan gum for various industries. The Other segment (1% of total revenue) primarily includes the company s financial business units. However, the segment makes negligible contribution to the company s revenues. REASONS TO BUY Focus on Cost Savings to Strengthen Business: Archer-Daniels is a leading player in the global food processing industry, with its network spanning across the Americas, Europe and Asia for transportation of agricultural commodities. The company remains focused on strengthening its business through increased cost savings, a key component of its long-term strategy. The company has exceeded its target of $400 million in run rate cost savings by the end of Further, the company recently communicated its target of $550 million in additional run rate cost savings over the next five years, including additional cost savings of $350 million from operational excellence and process enhancements and about $200 million in incremental purchasing savings. Additionally, the company remains focused on cost synergy activities by addressing redundancies and removing Equity Research ADM Page 2

3 overlapping corporate SG&A. Pertaining to this, the company recently announced that an additional IT center will be opened in its WILD s facility in Erlanger, KY. Managing Business Portfolio to Enhance Returns: We have observed that Archer-Daniels is strategically undertaking steps to manage its business portfolio, which is expected to help in realizing value and investing the same in best possible resources to enhance returns. This is evident from the company s actions involving the smooth integration of the WILD Flavors acquisition, which keeps it on track to achieve the targeted 100 million in synergies over the next three years. Other activities adopted in connection with this include the divestment of its South American fertilizer in December and agreements to sell its global cocoa business to Olam and chocolate business to Cargill. These acquisitions and divestitures are expected to solidify the company s portfolio, improve its knowledge, help focus on consumers and drive returns. Global Investments to Boost Profits: Apart from managing its business portfolio, the company is continuing with its investment activities to grow its business. With regard to this, it has shifted from domestic projects where returns are difficult to model to international projects that can be tracked more easily and will be accretive at a faster pace. Recent investments include the inauguration of a sweetener plant in the Chinese port city of Tianjin. Furthermore, the company is on track with the construction of its fiber plant in Tianjin, China; a feed premix plant in Nanjing, China; a specialty protein complex and Campo Grande in Brazil; and the expansion of its Fibersol production capacity at Clinton, IA. Disciplined Capital Strategy: Archer-Daniels has always maintained a disciplined capital allocation strategy, focused on making investments to develop its business, while using the excess cash to enhance shareholder returns through dividend payouts and share buybacks. The company returned over $1.8 billion to shareholders in 2014 in the form of share repurchases and dividend payments. Further, per the latest balanced capital allocation plan of the company, it will plough back nearly 30% 40% of its future cash flow from operations in value-generating projects, with the remaining share allocated toward undertaking strategic plans like mergers, acquisitions, dividend payouts and share repurchases. The company also plans to hike its dividend payout ratio, from a historic band of 20% 25% of earnings to a range of 30% 40% over the medium term, which underscores the confidence of management in its future prospects and financial strength. REASONS TO SELL Risk of Operating in Overseas Markets: Archer-Daniels financial performance may be adversely affected due to its significant presence in the international market which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits. Intense Competition May Adversely Affect Operations: The company faces intense competition from its rivals, such as Cargill Inc., Bunge Ltd. and Corn Products International Inc. in all segments of the markets where it operates. These markets are extensively competitive and hence, the company faces the risk of availability of substitutes. Being part of such a competitive industry, Archer-Daniels may find it difficult to execute and implement new business strategies, which in turn, may impact its operations adversely. Volatility in Commodity Prices May Impact Margins: We observe that the economy is witnessing volatility in commodity prices, which may affect the cost of input for the company. This in turn, is likely to adversely impact the company s revenues and margins. Hence, we believe that Archer- Daniels remains susceptible to the risk of rising commodity prices. Equity Research ADM Page 3

4 RECENT NEWS Archer Daniels Q4 Earnings Beat, Sales Miss; Hikes Dividend Feb 3, 2015 Archer Daniels Midland Company ended its run for 2014 on a strong note. The company s adjusted earnings for the fourth quarter of 2014 rose 5.3% year over year to $1.00 per share and surpassed the Zacks Consensus Estimate of $0.93. Further, including certain one-time items, Archer Daniels reported earnings of $1.08 per share compared with $0.56 in the year-ago quarter. Archer Daniels results gained traction mainly from strong ethanol demand which stemmed from reduced gasoline prices. The improved earnings were let down by a fall in revenues at all of the company s major segments, resulting in a 13.5% year-over-year plunge in total revenue. Total revenue of $20,894 million also lagged the Zacks Consensus Estimate of $23,289 million. Going by segments, quarterly revenues at Archer Daniels Oilseeds Processing segment plunged 13.9% to $7,048 million; the Agricultural Services segment s revenues declined 16.9% to $10,556 million and the Corn Processing segment s revenues slipped 5.4% to $2,889 million, all on a year-over-year basis. However, the company s Other segment s revenues almost doubled to $401 million from $201 million in the prior-year quarter. Q4 Operational Discussion Archer Daniels reported adjusted segment operating profit of $1,128 million, marking an improvement of 8.5% from the year-ago quarter. On a segmental basis, the Oilseeds Processing segment s adjusted operating profit of $395 million decreased $107 million year over year. Strong North American and European soybean crushing results were more than offset by weak South American results, due to soft crush margins and fertilizer results, coupled with sluggish sales. Archer Daniels' Corn Processing segment registered a $31 million fall in adjusted operating profit to $284 million from the year-ago quarter. The decline is primarily attributable to falling sweetener and starch results, and lower average selling prices, coupled with rising net corn costs. Going forward, management intends to enhance product mix and optimize expenses in order to generate profitability in this segment. Operating profit for the Agricultural Services segment went up $234 million year over year to $435 million on the back of strong results from the Merchandising and Handling, and Transportation and Milling businesses. A Glimpse of 2014 Archer Daniels full-year 2014 adjusted earnings advanced 37.3% year over year to $3.20 per share, coming ahead of the Zacks Consensus Estimate of $3.07. However, due to decline in revenues at most of its segments, total revenue dropped 9.6% year over year to $81,201 million and fell short of the Zacks Consensus Estimate of $85,275 million. Equity Research ADM Page 4

5 Financials Archer Daniels ended 2014 with $1,099 million in cash and cash equivalents as compared with $3,121 million at the end of At the end of fourth-quarter 2014, long-term debt including current maturities was $5,582 million, down from a debt of $6,512 million at the end of fourth-quarter Shareholders equity as of Dec 31, 2014 was $19,630 million. During 2014, Archer Daniels generated $5,043 million of cash from operating activities. Apart from this, the company generated strong returns with its trailing 4-quarter average adjusted ROIC reflecting a 240 basis points improvement from last year. At fourth-quarter end, adjusted ROIC was 9%, up from 8.5% at the end of third-quarter Moreover, the company returned over $1.8 billion to shareholders in 2014 in the form of share repurchases and dividend payments. In the fourth quarter, Archer Daniels bought back about 9.4 million shares. Further, the company announced a 17% hike on its quarterly cash dividend to $0.28 a share, payable on Mar 10, 2015, to shareholders of record as on Feb 17. Also, Archer Daniels plans to incur nearly $1.5 $2 billion for share repurchases in These facts underscore the company s solid financial status, giving it the flexibility to make capital expenditures. For 2015, the company aims to incur $1.1 $1.3 billion as capital expenditures. Other Developments During the fourth quarter of 2014, Archer Daniels completed the purchase of WILD Flavors GmbH and Specialty Commodities. Results of both these businesses formed part of the company s Other Operating Profits in the fourth-quarter results. Further, in 2015, a new business unit called WILD Flavors and Specialty Ingredients was formed, that includes the WILD Flavors businesses and the company s own specialty ingredients. This new business unit will form a reportable segment from first-quarter VALUATION Archer-Daniels current trailing 12-month earnings multiple is 15.0x, compared with the 13.7x industry average and 18.5x for the S&P 500. Over the last five years, Archer-Daniels shares have traded in the range of 7.6x to 20.5x trailing 12-month earnings. Moreover, the stock is trading at a discount to the industry average earnings based on forward earnings estimates. Our target price of $51.00, 15.0x 2015 EPS, reflects this view. Equity Research ADM Page 5

6 Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Archer-Daniels-Midland Company (ADM) Industry Average N/A 12.8 S&P Fresh Del Monte Produce Inc. (FDP) N/A N/A N/A TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Archer-Daniels- Midland Company (ADM) Industry Average S&P N/A 2.1 N/A Equity Research ADM Page 6

7 Earnings Surprise and Estimate Revision History Equity Research ADM Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of ADM. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform %, Neutral %, Underperform 8.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research ADM Page 8