ADM – Below Consensus, But Quarter is a Look Back – Let’s Look Ahead

Last night, ADM reported Q1 EPS of $0.48 versus consensus of $0.52 – most of the weakness in the quarter is related to lingering issues with the U.S. drought, and as a result represent more of a look back than a look at either the present or likely future state of the agricultural complex.  Recognizing that, we think investors should be using any opportunity that some reasonably unappealing results might present in terms of stock weakness to become involved in what we still see as a compelling investment case.



We remain bullish of the size of the coming corn crop (it’s admittedly early) and bearish on corn prices – if we are correct, both agricultural services and ethanol at ADM should be poised for substantial improvement.



What we liked:

  • Improved ethanol results, a trend that we think should continue
  • Completed due diligence on GrainCorp, will move forward to acquire company for A$12.20 per share – see our prior note on the topic - quick summary, we like the deal a heck of a lot
  • Balance sheet well-managed – working capital was neutral to cash flow in what is historically a quarter where it is a large use of cash
  • Positive free cash flow versus significant negative free cash flow in the year ago quarter

What we didn’t like:

  • EPS below consensus
  • 42% decline in operating profit in agricultural services (however, linked to ongoing impact of last year’s drought)
  • Oilseeds profit declined 42%
  • Results are likely to remain challenged until we see the U.S. crop

I know we are starting to sound like a broken record in terms of not seeing a great deal of opportunity across our universe, but ADM is one name where we see a favorable risk/reward profile – upside toward $40 per share if the U.S. crop breaks right and back toward $30 if we get a second consecutive year of a once in a lifetime drought.

 

Call with questions,

 

Rob

 

Robert Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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Matt Hedrick

Senior Analyst