Tags: ADM | hit | commodity | costs

ADM Gets Hit by Commodity Costs

By Tim Plaehn   |   Thursday, 10 Nov 2011 12:23 PM

Into the start of the company's 2012 fiscal year, Archer Daniels Midland (ADM) is seeing several quarters of lower profits as the result of higher commodity prices. ADM has a long history of profitable growth, so investors should determine if this hit is a temporary downturn or the signs of a long term trend.

ADM purchases agricultural commodities, processes the commodities into food and energy products, and transports the products to market. The company has a global footprint with processing plants in North and South America, Europe and Asia. Major business segments include oil seed processing, corn processing, cocoa pressing and agricultural services such as grain storage and transport.

The company's 2012 first quarter closed on Sept. 30, 2011. For the quarter, ADM reported net income of 66 cents per share, up from 54 cents a year earlier. However, earnings from continuing operations were 58 cents per share.

The difference was due to adjustments in inventory. Segment operating profits of $699 million were down 9 percent from the first quarter of fiscal 2011. The 2011 fourth quarter also produced disappointing earnings results, with diluted income per share of 58 cents, down from 69 cents.

Segment operating earnings in the fourth quarter were up by $89 million but net income fell by $65 million.

Earnings hit

The two quarters of disappointing earnings were due to different factors. In the fiscal 2011 fourth quarter, income tax expense increased to a 50 percent tax rate from a 19 percent rate, resulting in an extra $280 million in taxes. The higher rates were due to profits being realized in different geographic areas.

For the first quarter of 2012, earnings were impacted by corn prices more than twice as high as a year earlier. The result was an almost 50 percent decrease in operating profits from corn processing. Continued higher corn prices could be a problem for ADM if the company cannot pass the costs along in the form of higher product prices.

The analysts of Argus Research recently initiated coverage on ADM with a hold rating on the stock. Standpoint Research has upgraded the company to buy from hold with a target price 15 percent above the current share price.

The company next reports on Feb. 1.

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