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ADM shares outperform, after tax windfall, ingredients drive profits beat

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Shares in Archer Daniels Midland defied a negative start on Wall Street after the group reported stronger earnings growth than investors had expected, helped by a biodiesel windfall and “strong margins” in ingredients.

 

The US-based group, with Bunge, Cargill and Louis Dreyfus one of the ABCD group of ag trading giants, was also sanguine on its prospects, thanks to factors including the phase one China-US trade deal – even as many investors fret that its pledges may be undermined by the coronavirus outbreak.

 

The company’s ADM Investor Services brokerage arm itself reported overnight that “grain traders are disappointed with the lack of buying interest from China” since the deal.

 

For China to fulfil its pledge on purchases of US ags “it will take aggressive buying in many of the agricultural markets”.

 

Trade deal boost

However, Archer Daniels Midland said in its results statement that “we expect market conditions to improve as the year progresses, particularly as impacts from the US-China phase one trade deal take hold.

 

“We’re excited about the opportunities we see in 2020 and beyond.”

 

“Another year” of profitability growth above 20% in its nutrition division, besides the input from acquisitions and a drive to improve its performance, “give us confidence in strong results in 2020 and the years to come”.

 

Tax windfall

For the October-to-December quarter, the group unveiled a 60% rise to $504m in earnings, equivalent to $1.42 per share on an adjusted basis, up from, $0.88 per share a year before

 

Revenues rose by 2.4% to $16.33bn.

 

The extent of the earnings growth reflected largely a $270m windfall from a US government decision to reimplement the $1-per-gallon blenders’ tax credit on biodiesel, which has been extended to 2022 and backdated to 2018.

 

“The impact of the passage of the retroactive biodiesel tax credit for 2018 and 2019 was a major driver” of a profits surge at the refined products business, said ADM, reporting the windfall as having boosted earnings by the equivalent of $0.61 per share.

 

‘Strong global demand’

However, even excluding the tax credit boost, ADM’s earnings came in ahead of the $0.69-per-share result as expected by analysts surveyed by Refinitiv.

 

ADM shares bucked a negative session on Wall Street to rise by 5.3% to $46.00 in early deals, before easing back to $45.66 an hour into the session, a rise of 4.5% on the day.

 

The S&P 500 share index was trading down 0.5%.

 

The refined products business, which saw operating profits jump to $363m from $72m a year before, also “benefited from strong global demand for both biodiesel and foods oils”, as highlighted by the late-2019 surge in palm oil prices.

 

Its performance more than offset a decline in profits from oilseeds processing - which were boosted a year before by the knock-on effects of drought in cutting the crush in top soymeal and soyoil exporter Argentina – and in ag services, which suffered from the knock-on effects of US wetness.

 

“In North America, a delayed US harvest contributed to lower export volumes and correspondingly lower margins,” ADM said.

 

Margin divergence

The group also reported a decline of 23%, to $174m, in operating profits at its carbohydrate solutions division, where an improved performance in starches and sweeteners was more than offset by a tumble back into the red at its ethanol division.

 

ADM, which is moving some dry ethanol mills into a wholly-owned subsidiary as it mulls its future in the sector, noted “continued unfavourable ethanol industry margins”.

 

However, the nutrition division reported a 40% jump to $102m in operating profits, with growth in both the WFSI flavourings arm and the animal feed and additives unit.

 

“Strong sales and margins” at the Wild flavourings business “drove results for the quarter” at WFSI.

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