Morningstar | Archer Daniels Midland Executes Well Amid Changing Global Crop Trade Patterns; FVE Intact. See Updated Analyst Note from 07 Nov 2018
Archer Daniels Midland reported solid third-quarter results, as adjusted segment operating profit grew nearly 60% year on year to $861 million. Higher profits were driven by stronger origination and oilseeds results. With our outlook largely unchanged, we maintain our $48 per share fair value estimate for Archer Daniels. Our no-moat rating also remains intact.In the oilseeds segment, operating profit more than tripled year on year to $349 million, driven by an elevated soy crush spread. Based on CME Group data, the soy crush spread currently sits around $1.20 per bushel, down from $1.70 per bushel earlier in the year. However, the spread remains above the 2013-17 average of roughly $0.80. While the soy crush spread is just one of many variables that drives the firm's profits, the higher spread has proven beneficial year to date.
In the origination segment, which houses the trading desk, Archer Daniels was able to take advantage of favorable grain merchandising conditions. This stemmed from a change in global crop trade patterns due to the trade dispute between the U.S. and China. Origination operating profit grew $90 million versus the prior year period to $129 million in the third quarter. When the Chinese tariffs on U.S. crop exports, such as corn and soybeans, were announced, we forecast that Archer Daniels would be able to take advantage of increased regional pricing dislocations in order to grow grain merchandising profits over the next couple of years. Unless the trade dispute is resolved, we continue to expect that it will generate annual operating margins above 2%. This is in line with the company's historical average, but above our long-term forecast of 1.5%. Over the long term, we expect lower grain merchandising profits as farmers build more grain storage and have access to better pricing information, which reduces grain merchandisers' ability to profit from pricing dislocations.
Archer Daniels Midland is a human and animal nutrition and an agricultural origination and processing company. The company has three segments: Ag Services and Oilseeds, which includes activities related to the origination, merchandising, transportation, and storage of agricultural raw materials, and the crushing and further processing of oilseeds such as soybeans and soft seeds into vegetable oils and protein meals; Carbohydrate Solutions, which is engaged in corn and wheat wet and dry milling and other activities; and Nutrition, which engages in the manufacturing, sale, and distribution of an array of products including plant-based proteins, natural flavor ingredients, and flavor systems.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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