Tuesday, November 6, 2007

ADM's Fantastic Quarter: Its About Commodities

Archer Daniels Midland (ADM) released record Q1 results an the news for shareholders was indeed good.

ADM has been hit this year like the rest of the ethanol sector as investors apparently forgot about its other segments. Profits came in at 71 cents a share vs 61 cents last year and 59 cents expectations.

*Net sales and other operating income increased 36% to $12.8 billion. Increased selling prices resulting from sharp rises in commodity prices accounted for approximately 75% of the increase while higher sales volumes, principally vegetable oil and wheat, accounted for the remaining 25% increase.
*Net earnings increased $38 million due.
*Oilseeds Processing operating profit increased $39 million to $209 million from $170 million last year due principally to strong global demand for protein meal and oil. Worldwide crush volumes increased 2.4% to 7.2 million metric tons.
*Crushing and origination results increased $27 million due principally to better crush margins in North America and improved origination results in South America partially offset by a reduction in crush margins in Europe.
*Value added refining, packaging and biodiesel results increased $13 million principally from improved refining volumes and margins
*Corn Processing operating profit decreased $36 million to $253 million from $289 million last year due principally to lower ethanol sales prices and volumes and higher net corn costs which were partially offset by favorable risk management results.
*Sweeteners and Starches operating profit increased $45 million to $164 million on higher average sweetener and starch selling prices partially offset by higher net corn costs
*Agricultural Services results increased $114 million to $229 million due principally to improved global merchandising and handling results as volatile commodity market conditions, large North American crops and global wheat shortages provided profit opportunities.
* Shares outstanding decreased 2%

In short, ADM is a global commodity play. Not just ethanol or biodiesel like Verasun (VSE) and Pacific Ethanol (PEIX), not just sweeteners, not just food processing, they are all of the above. If corn prices crimp ethanol profits, they can move that into sweeteners and make money there. As wheat prices rise, ADM make money there. As more people require more food, ADM is there the provide the processing for it and profit from it.

The best part? ADM will increase it ethanol production 50% and double it biodiesel production in the next 18 months. The ethanol expansion alone will add 25% to earnings at today's depressed selling and record high corn prices. All this assumes no acquisitions of which ADM has been vocal about seeking out.

Trading at just 10 times this years and 12 times next years earnings ADM is THE company perfectly positioned to capitalize on the world predominate trends, commodities, biofiels and food.

ADM makes money from all three. sooner or later folks will figure this out.

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