NEW YORK—Food processor Archer Daniels Midland reports earnings for the 2008 fiscal third quarter on Tuesday. The following is a summary of key developments and analyst opinion related to the period.
OVERVIEW: The biggest issue facing Archer Daniels Midland is the rising price of corn -- the key component of most ethanol produced in the U.S. The ethanol industry's profitability has been limited by the commodity's surging cost, which producers have not been able to pass completely onto refiners. Despite being one of the country's largest ethanol producers, the Decatur, Ill.-based company counts on ethanol for only about one-tenth of its total sales. It still makes most of its money by processing soybeans and corn for animal feed, oil and other food products.
BY THE NUMBERS: Analysts polled by Thomson Financial estimate earnings of 70 cents per share on revenue of $13.45 billion.
ANALYST TAKE: The biggest concern for Citi Investment Research analyst David Driscoll has been the effect of rising corn prices on the company's corn processing operations, which, he said, represents the largest and most important segment for the company. The corn processing segment includes activities related to the production of sweetners, starches, syrups and other specialty food and feed ingredients, as well as ethanol.
However, after meeting with company management earlier this month, Driscoll said he has been reassured that ADM is managing its way through the record-setting corn prices and is perhaps even thriving.
Driscoll, who has a "Buy" rating and $52 target price on the stock, subsequently raised his third-quarter earnings estimate by 10 cents to 75 cents per share, to reflect better operating conditions in agricultural services and oilseed processing.
"When we put it all together, we believe that business at ADM is really quite good," Driscoll wrote in a note to clients. "ADM management indicated that corn-derived ethanol margins have continued to improve despite high corn prices, and on the back of a rapid rise in gasoline and ethanol prices. Further, it would seem that fears of vast ethanol oversupplies have proven to be false, thus far."
Driscoll said a significant drop in crude oil prices is one of the biggest risks to his earnings estimates, as declining crude oil values would impact the company's ethanol prices and margins, as well as other areas of the business, such as its biodiesel operations.
WHAT'S AHEAD: Driscoll forecasts above-normal profitability within the company's agricultural services business for at least a couple more quarters. He said the company should also benefit from improving conditions in the North American high-fructose corn syrup market, where ADM is a leading producer. The company's oilseed business also has the potential for sizable future growth, Driscoll said, due to the emergence of the global biodiesel market.
STOCK PERFORMANCE: ADM shares slipped 11 percent during the quarter.
