EUR 850.00 For Business Accounts Only

Morningstar | ADM Reports Strong 2Q; We Raise Our FVE to $48 on Improved Near-Term Outlook

Archer-Daniels Midland reported solid second-quarter results, as adjusted operating profits grew roughly 40% year on year to $924 million during the quarter. The growth was driven primarily by increased grain merchandising profits in the originations segment and higher soy crush margins in the oilseeds segment, partially offset by a decline in the carbohydrate solutions segment. Having updated our model to account for higher near-term profitability in the originations and oilseeds segments, we're increasing our fair value estimate to $48 per share from $46. Our no-moat rating remains intact.

In the originations segment, profits more than tripled year on year to $189 million during the quarter. ADM was able to take advantage of a favorable grain merchandising environment. It benefited from changing global trade patterns due to the proposed tariffs that created temporary pricing dislocations, which have historically created profit opportunities for global merchandisers like ADM. During the quarter, management noted there was strong demand for North American grain exports outside of China as well as increased Chinese demand for South American exports. As we noted when the Chinese tariffs on U.S. crop exports were announced, we think ADM is well-positioned to benefit in the near term from changing global trade patterns. We expect this dynamic will drive higher profit margins in 2018 and 2019.

In the oilseeds segment, profits grew nearly 70% year on year to $341 million during the quarter, driven by higher soy crush margins. We note that the soy crush spread, based on Chicago Board of Trade data, currently sits around $1.70 per bushel, which is more than double the 2013-17 average of roughly $0.80. While the soy crush spread is just one variable that drives ADM's profits, the higher spread has boosted 2018 operating results. Over the long term, however, we think ADM's profits will be driven by increased demand for soy-based proteins, which will allow ADM to spread its fixed costs over greater volumes. Our long-term profit margin forecast is 4.5% to 5%, up from 3.7% in 2017, due to fixed-cost leverage as the company processes higher oilseeds volumes.