EUR 850.00 For Business Accounts Only

Morningstar | ADM Positioning Downstream Businesses for Long-Term Success; Maintaining $46 FVE Despite Weak 1Q. See Updated Analyst Note from 26 Apr 2019

Archer Daniels Midland had a rough start to the year as the carbohydrate solutions segment was affected by lower starch and sweetener sales. Combined with an operating loss in the animal nutrition business, total adjusted segment operating profit fell 15% year on year to $608 million in the first quarter. We lowered our near-term profit outlook, but this was offset by time value of money effects. We maintain our $46 fair value estimate for no-moat ADM.

In the carbohydrate solutions segment, sweetener and starch production volume fell due to severe weather in the Midwest that affected ADM's corn milling operations. While we have slightly lowered our 2019 outlook for the segment, we expect second-half results will be closer to those of 2018 as weather-related issues subside. Sweetener and starch profits were also affected by falling demand for high-fructose corn syrup. As a result, ADM will repurpose its Marshall, Minnesota, mill to stop producing HFCS and produce starches instead. We are in favor of this move as it positions the business to better support profitability over the long term.

In the nutrition business, segment profits fell 16% year on year to $81 million during the quarter. Higher wild flavors and specialty ingredients, or WFSI, profits were more than offset by a $7 million operating loss in the animal nutrition business versus a $23 million profit a year ago. Management cited lower animal nutrition prices and higher operating costs related to the integration of the Neovia acquisition, which closed in January.

While higher operating costs for animal nutrition may persist over the near term, we expect the segment to return to profitability in the second quarter. When ADM acquired WFSI in the fourth quarter of 2014, operating margins fell to a meek 1.3% before rebounding to 11.2% the following quarter. Regardless, our long-term outlook for low teens profit margins in the nutrition segment is intact as ADM realizes cost-saving synergies.

ADM said it will begin to separate its ethanol business into a subsidiary to give management the option to spin off the business at a later point. While the move may make some strategic sense, we note that ADM competitor Bunge has tried unsuccessfully to do the same thing in recent years. We doubt ADM will be able to sell or spin off the business at an attractive price. Regardless, we continue to include the ethanol business in our forecast for now.