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Archer Daniels (ADM) Rallies 31% YTD on Sound Strategies

Zacks

Archer Daniels Midland Company ADM stock is moving up the charts, courtesy of its robust growth strategies that include focus on cost savings, management of business portfolio, Project Readiness and disciplined capital allocation. Driven by these strategic efforts, the company delivered impressive performance in the first half of 2018 and issued an upbeat outlook for the second half.

Also, this Zacks Rank #1 (Strong Buy) stock has gained 31.2% year to date, outperforming the industry’s 15.7% rally. Its VGM Score of A further demonstrates the company’s inherent potential.

Let’s delve deep.

Growth Drivers

Archer Daniels is undertaking a series of strategic measures to manage business portfolio, which are expected to help in realizing value and enhance returns. This apart, the company has acquired and divested businesses to strengthen its portfolio and boost shareholder value.

Moreover, Archer Daniels remains focused on five major platforms — animal nutrition, bioactives, carbohydrates, human nutrition and taste — along with geographic regions to drive growth. Management has announced three acquisitions in the Nutrition division besides completing two joint ventures overseas in the last reported quarter.

Meanwhile, the company’s focus on strengthening its business through increased cost savings — a key component of its long-term strategy — is commendable. Archer Daniels targets $550 million in additional run rate cost savings over the next five years, including cost savings of $350 million from operational excellence and process enhancements, and about $200 million in incremental purchasing savings. In the first six months of 2018, it generated operational cost savings of more than $150 million on a run rate basis and is on track to exceed the targeted $200 million savings for 2018.

Further, the company has been enhancing operational efficiency at its production and supply chain networks to curtail costs. It is progressing well with business transformation, under the 1ADM program, which forms an integral part of Project Readiness. The company expects Readiness to help management have a more coordinated approach toward driving business improvement, standardizing functions and enriching consumers’ experience. For 2018, Archer Daniels remains on track with further 1ADM rollouts to cover the entire enterprise.

Archer Daniels’ capital allocation strategy focuses on making investments to develop its business and enhancing shareholder returns. In the first half of 2018, it spent $379 million each for capital expenditures and paying dividends. Also, it paid quarterly dividend of 33.5 cents per share on Sep 6. This underscores management’s confidence in Archer Daniels’ prospects and financial strength.

1H18 Performance

Archer Daniels has put up a stellar show in the first two quarters of 2018, with earnings and sales beating the estimates and improving year over year. Notably, the company delivered third straight positive earnings surprise and second consecutive sales beat in second-quarter 2018. Results were aided by the aforementioned strategic initiatives and cost-saving efforts. Archer Daniels is also witnessing solid sales across all its segments and higher adjusted segment operating profit with lower tax rate.

However, the company witnessed softness in the Carbohydrate Solutions segment in the second quarter. While the segment’s quarterly revenues grew 4.6% year over year, adjusted operating profit declined 10.8%. The downside can be attributed to soft Starches and Sweeteners results along with weak volumes in Caribbean operations. Bioproducts also remained soft on lower ethanol production volumes coupled with increased expenses. Nevertheless, the segment witnessed robust starch volumes and dry sweetener margins in the quarter. For the second half of 2018, the Carbohydrate Solutions segment’s results are projected to be lower year over year due to weak ethanol business.

Management expects solid momentum witnessed in the first half of 2018 to continue in the second half. Also, the company remains optimistic about delivering impressive performance, driven by improving market conditions, higher global demand, gains from U.S. tax reform, product innovations and solid strategies.

Going by segments, management expects Origination, Oilseeds and Nutrition results to improve year over year in the third quarter of 2018.

Want More of Solid Consumer Staples Stocks? Look Below

The Chefs' Warehouse, Inc. CHEF has an impressive long-term earnings growth rate of 19% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Sysco Corporation SYY has a long-term earnings growth rate of 10.6% and a Zacks Rank #2 (Buy).

Ollie's Bargain Outlet Holdings, Inc. OLLI is also a Zacks #2 Ranked stock, which has outpaced the earnings estimates by an average of 9% in the trailing four quarters.

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