Archer-Daniels-Midland (NYSE:ADM) procures, transports, stores, processes, and merchandises agricultural commodities, products, and ingredients. It operates through 3 segments: Ag Services and Oilseeds, Carbohydrates and Nutrition. News came out today that the company expects its Nutrition business to report its operating profit down by 18% and that the company is being investigated by the SEC for accounting practices within that segment. ADM stock is down roughly 25%.
Segmental adjusted operating profits ($mil CY2022) (similar level to GAAP OP)
Ag Services and Oilseeds: $4,386
Carbohydrates: $1,360
Nutrition. $736
Revenues ($m cy2022):
Ag Services and Oilseeds: $79,563
Carbohydrates: $13,961
Nutrition. $7,736
Why did AMD’s Ag segment do superbly in 2022? “strong global demand continued due to a short crop in South America. The conflict in Ukraine resulted in even tighter global stocks of commodities and created high volatility, which had a positive impact on North and South American origination prices. Global Trade results were driven by market disconnects, tight supply, strong destination marketing margins, and firm ocean freight rates. North American origination was negatively impacted by weather-related supply disruption and delayed planting and lower river levels. Crushing margins continued to benefit from strong protein and renewable diesel demand and tight oilseeds stocks.”
Ag segment’s link between revenues and operating profit: “changes in agricultural commodity prices have relatively equal impacts on both revenues and cost of products sold. Therefore, changes in revenues of these businesses do not necessarily correspond to the changes in margins or gross profit.”
Carbohydrates operations: “changes in revenues of these businesses may correspond to changes in margins or gross profit.”
Even though operating profit for ADM’s Nutrition business is projected to tank, there are still other forms of operating profit to make up for it. When looked at closely, it is a relatively small amount of decline anyway.
Volatility helps companies like ADM to bring in more profit. Recent news about the Suez canal, where Houthi rebels from Yemen are jeopardizing safe passage for ships, not to mention dangerously low levels of water in the Panama canal as well as conflict, war, invasion all contribute to volatility. I think this stock is a buy at this level with a P/E of around 7 with a dividend of 3.5% that has been distributed for 90 years.
*I own and recommend shares of ADM*
Sources: 2022 presentation, 2022 annual report
Devlin Demontigny 