Though it's true that Archer Daniels Midland (NYSE:ADM) produced a large absolute amount of free cash flow last year, I'm not necessary sold on this stock as a free cash flow engine. Performance on that metric has been quite erratic over the years, and even last year's good result was still pretty low relative to sales. What's more, I'm not sure this company can consistently generate good returns on the capital it has.
Its first-quarter results missed the published average estimates on both the top and bottom lines. Revenue dropped 4% and net income fell 30%, though segment operating profits did rise 3% over last year. Archer Daniels Midland's net results were hurt in part by the presence of a large last-in, first-out inventory benefit last quarter. If you strip that out of both this quarter and last, pre-tax earnings were still down, but only by 2%, and that's considerably better than the as-reported difference.
Looking at cash flow, both operating and free cash flows were down markedly from the year-ago quarter, though I'd caution everyone not to read too much into a single quarter's performance.
Turning to the segments, the company's oilseed processing profits improved 9% as strong results overseas counterbalanced weakness in North America. Overall conditions seem to be improving across the globe, but it seems to me that much of the world has underused capacity that could keep a lid on profits. With corn processing, operating profit climbed 32% as the sweeteners and starches business did very well, making up for some losses in the bioproducts business.
What troubles me about Archer Daniels Midland is the low return on capital. Before the last two fiscal years, which were unusually strong, the company hadn't managed to exceed a 5% return on capital. And that's not so good relative to the 9% or so cost of capital that I estimate for this company. Some of that is certainly due to the commodity nature of the business, but some of that is also on management.
What to make, then, of the company's efforts to expand its biodiesel and ethanol businesses? It's probably not a bad idea, but it's an idea that many other companies also have now. So, one has to wonder whether there will really be high sustainable returns in those businesses. However, it's pretty clear what the company can and can't do with the food processing business, so I suppose branching out to new areas is worth a shot. Nevertheless, I can't say that companies like ADM or Bunge (NYSE:BG) really thrill me today.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
