Tuesday, May 1, 2007

ADM: Long Term Outlook Fantastic

From The Press Release:
  • Net earnings for the quarter ended March 31, 2007 increased 4 % to $ 363 million -- $ .56 per share from $ 348 million --$ .53 per share last year.
  • Third quarter segment operating profit increased 8 % to $ 593 millionfrom $ 549 million last year.
  • Oilseeds Processing operating profit decreased due to lower softseed and biodiesel processing margins.
  • Corn Processing operating profit increased 15% due to lower operating costs and increased ethanol and sweetener selling prices partially offset by increased net corn costs.

"We performed well in a challenging quarter," said ADM Chairman and CEO Patricia A. Woertz. "We are particularly pleased with continued strong performance in our corn processing segment. Our results also
benefited from actions to strategically align our portfolio and our outlook on future opportunities remains quite strong."

From The Earnings Conference Call:
  • 15.4 million shares repurchased at $34 a share
  • US corn crop production up from 74 to 90 million acres
  • Brazil corn production up 7 million bushels (42 to 49 million)
  • Argentina, China will also have larger corn crop production in 2007-2008
  • Corn yields per acre will jump significantly either this year or next due to new seeds
  • There are still more acres under the conservation program that can be planted with corn
  • 4th Q 2007 will start selling HFCS to Mexico in large quantities.
  • Worldwide Soybean supplies adequate for 2007-2008
  • Washington will expand the RFA (Renewable Fuels standard) to 15% of all gasoline sold
  • Current studies indicate Flex Fuel car fleet expansion will not be necessary to accomplish this
  • Oil Processing results will correct itself this year as rapeseed production recovers from abnormally low levels currently
  • Ethanol expansion when complete will produce over 1.5 gallons annually billion annually or approx. 19% of US total (estimated at 8 billion gallons by the end of 2008)
  • Additional business and governmental partnerships "will most definitely" be announced this year.
  • HFCS pricing will remain at current historically high level throughout year (are contacted)
  • Ethanol prices will increase throughout year. Demand is very strong
  • Biodiesel demand will double between now and 2012
  • ROE is targeted at 13% which is "well above cost of capital" (q1 was 13.8%)
  • Long-term opportunities are "very strong". Woertz "this quarters results actually increases my confidence in our ability to manage through any difficulty and make me more optimistic about our future"
  • Two cellulose ethanol project are continuing
A "challenging quarter" for ADM. Is it a "bad" one? Consider this, ADM encountered it's highest corn prices of approx. $2.75 to $3.00 per bushel since 1984 yet still managed to increase profits in that division over a prior year comparison of $2.37 a bushel which was below the 35 year average of $2.57 a bushel. With a record US and worldwide corn crop planted this year (the most since WWII), prices will fall and ADM's profits in this division will explode. ADM managed this price spike brilliantly and CEO Woertz ought to get kudos from investors for doing so.

Now, ADM is up 25% since I recommended it in January so expect the stock -to get hit because the "analysts" expected 60 cents a share. This will be a text book call by the analyst. Because of the run up, expect a downgrade or two in the stock and these folks only look out quarter by quarter. This is ok and expected. If you have been kicking yourself for not buying it sooner, you are now going to get a chance to get it cheaper. What does this mean long term? It means that even a spike in corn prices to 35 years highs cannot derailed this companies corn processing operations.

The Future: Massive Capacity Expansion (Completion Dates):
Missouri JV Biodiesel Plant : Completed 12/2006
N. Dakota Biodiesel Plant: 6/2007
Brazil Biodiesel Plant: 8/2007
Iowa Ethanol Plant: Phase I: 6/2007 Complete: 10/2008
Illinois Ethylene Glycol Plant: 10/2008
Pennsylvania, Cocoa Plant: Phase I : 3/2008 Complete: 1/2009
Nebraska Ethanol Plant: 11/2008
Nebraska PHA Plant: 11/2008
2nd Nebraska Etannol Plant: 12/2008

All are on schedule and on budget.

ADM has grown earnings spectacularly the past two years without adding any additional capacity. When this new production capacity goes online, earnings growth of 60% just from it alone is not only likely, but a in the end, probably a conservative estimate.

The ADM that reported to day is a shell of the company that will report earnings next year this time and will be dwarfed by the capacity of the ADM at the end of 2008. Long term shareholders are going to be richly rewarded as the long term fundamentals for all their businesses are favorable. One quarter does not a year make and smart investor will use the dip upcoming to buy more shares at artificially low prices.

Pentagon Wants Biofuels:
The U.S. Defense Department has launched an effort to reduce the military's reliance on traditional aircraft fuel.

The Pentagon's Defense Advanced Research Projects Agency has released a tender for the exploration of energy alternatives for the military. Officials said DARPA has sought proposals from companies and universities that would increase fuel efficiency and produce biofuel for military jets from agriculture or aquaculture crops."DARPA seeks processes that use limited sources of external energy, that are adaptable to a range or blend of feedstock crop oils, and that produce process by-products that have ancillary manufacturing or industrial value," the agency said.

Officials said commercial alternatives to traditional fuel have not met the higher energy density and wide-operating temperature range required for military aviation uses. They said the Pentagon has designed a program entitled BioFuels to convert crop oil to military aviation fuel, known as JP-8. Those invited to participate in the competition would deliver at least 100 liters of JP-8 surrogate biofuel for initial government laboratory testing.

Anyone want to bet this is the "governmental partnership" CEO Woertz spoke of being announced this year?

Let's not forget, despite the temporary headwinds, earnings still grew and even at $40 a share ADM only trades at 14 times trailing twelve months earnings. This stock is by no means overvalued. We have a company with fantastic long term fundamentals that is the world leader in all its product categories trading at a discount to the market. What is not to like?

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