We are downgrading our long-term recommendation on
Daniels Midland Company
) to 'Underperform' from 'Neutral', based on disappointing fourth
quarter 2012 results.
This leading food processing company's quarterly earnings fell
approximately 45% year over year to $0.38 per share, missing the
Zacks Consensus Estimate of $0.62.
Operating profit for the Agricultural Services segment declined
due to tight U.S. crop supplies impacting both export volumes and
U.S. merchandising results, while operating profit for the Corn
Processing and Oilseeds Processing segments were affected by
negative ethanol margins for the former and weak results in cocoa
and other for the latter.
By nature, the agricultural commodity-based business of Archer
Daniels is capital intensive, and hence requires sufficient
liquidity and financial flexibility to fund operating and capital
requirements. Thus, limited sources of cash generation and any
difficulty in accessing external financing may significantly weigh
on the company's results. As of year-end 2012, Archer Daniels had
about $1,291 million in cash and cash equivalents, while long term
debt was $8,212 million.
Despite the adverse effects of poor earnings results and increased
debt burden, Archer Daniels continues to move ahead with its rapid
expansion strategy, which includes expanding crushing capacities in
North America, and fertilizer blending and biodiesel capacities in
South America. In Europe, the company has acquired processing
facilities in Czech Republic and Germany and three storing
facilities in Slovakia.
In addition, in order to tap the growing global demand for crops
and agricultural products, Archer Daniels is expanding its global
footprint in the emerging markets, especially in Asia. These
initiatives offer a strong upside potential to the company in the
Although Archer Daniels' expansion strategy of increasing its
global footprint in the key agricultural regions via acquisitions
and joint ventures is a positive trait, we believe sourcing of
commodities and stringent credit facilities may pose a threat to
its operating performance.
The company faces intense competition and adverse currency
fluctuations. This may undermine the company's long-term
initiatives and dampen its financial results. The company's prime
competitors include Cargill Inc.,
Tyson Foods Inc.
) and Corn Products International Inc.
In the event of such poor earnings and financial prospects for the
near term, Archer Daniels maintains a Zacks #5 Rank, implying a
short-term 'Strong Sell' rating.
ARCHER DANIELS (ADM): Free Stock Analysis
BUNGE LTD (BG): Free Stock Analysis Report
TYSON FOODS A (TSN): Free Stock Analysis Report
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