Image source: USDA/ Flickr..
There are many things that remain outside a company's control. For agricultural raw-materials processor Archer Daniels Midland (ADM +2.15%), commodity prices in the second quarter of 2015 were just out of reach of its corporate mind-control ray. (Kidding.) Despite the short-term headwinds, the company turned in a solid three months of results. Here's a level-headed analysis of what you need to know.
By the numbers
You can view the full press release for more detailed (but unaudited) financial numbers, but here's a snapshot of important metrics compared with last year's second quarter.
|
Financial Metric |
Second Quarter 2015 |
Second Quarter 2014 |
% Change |
|---|---|---|---|
|
Total revenue |
$17.2 billion |
$21.5 billion |
(20%) |
|
Gross profit |
$0.96 billion |
$1.17 billion |
(18%) |
|
Gross profit margin |
5.6% |
5.4% |
3.7% |
|
Segment operating profit |
$808 million |
$888 million |
(9%) |
|
Fully diluted EPS |
$0.62 |
$0.81 |
(23.5%) |
Source: Archer Daniels Midland press release.
The year-over-year 20% drop in total revenue and 18% drop in gross profit don't look great on paper, but the aforementioned weakness in commodity prices were almost entirely to blame. That is evidenced by the fact that Archer Daniels Midland processed nearly identical volumes (0.018% more in 2015) of raw materials compared with last year's comparable period.
The good news is that the company's newest business segment, Wild Flavors & Specialty Ingredients, delivered 130% revenue growth and 39% operating profit growth that helped the company improve its gross profit margin. That's exactly why Archer Daniels Midland acquired WILD Flavors -- to inject some high-margin business capable of insulating against volatility in its commodity business segments. Investors have to love when a plan comes together.
Driving forces
While Wild Flavors & Specialty Ingredients executed on its strategy in the second quarter of 2015, Oilseeds processing made a major positive impact as well. Archer Daniels Midland increased processed volumes for the business segment 8.4% compared with the same period in 2014 to take advantage of market conditions.
Of course, if processed volumes for oilseeds were up and total processed volumes were nearly identical to those last year, then that means another segment saw a decline in volumes. Enter the company's Corn processing segment, which had processed volumes dialed back nearly 10%. Why?
Continuing weakness in the corn and ethanol industries this year, especially compared with record strength in 2014, had an outsized effect on the year-over-year results. In fact, Archer Daniels Midland, the nation's largest ethanol producer, generated $102 million less operating profit from ethanol alone in the second quarter of 2015 compared with that of 2014. And it produced a record volume of ethanol. That the company's total segment operating profit was only down $80 million year over year highlights the magnitude of the swing in ethanol markets in the past 12 months.
Here's a simple table showing the segment-by-segment performance.
|
Business Segment |
Second Quarter 2015 Operating Profit |
Second Quarter 2014 Operating Profit |
% Change |
|---|---|---|---|
|
Agricultural Services |
$152 million |
$184 million |
(17.4%) |
|
Corn Processing |
$204 million |
$338 million |
(39.6%) |
|
Oilseeds Processing |
$344 million |
$280 million |
22.9% |
|
Wild Flavors & Specialty Ingredients |
$104 million |
$75 million |
38.7% |
|
Segment Operating Profit |
$808 million |
$888 million |
(9%) |
Source: Archer Daniels Midland press release.
In addition to strong operational performance, Archer Daniels Midland continued to deliver on its shareholder-friendly track record, returning over $1.5 billion to shareholders through dividends and the repurchase of 24 million shares during the first half of 2015.
What does it mean for investors?
Archer Daniels Midland's second-quarter results serve as a perfect example why it's important to dig deeper into the numbers, to truly understand the external factors capable of affecting your investments, and to not worry about short-term performance. If an investor focused only on revenue, profits, and EPS compared with the year-ago period, then it looks as if the company is asleep at the wheel. But having knowledge of the driving forces of the company's business shows that, even with respectable declines in the top and bottom line, Archer Daniels Midland is running an efficient business and responding to market conditions when possible (see: oilseed processing volumes).
In all, this was a pretty good quarter for Archer Daniels Midland, especially given the challenges within its operable markets. While there's no telling how long commodity prices will remain subdued or when the ethanol market will enable higher margins, I see no reason to worry about the company as a long-term investment.
