Archer Daniels' Cost Savings On Track, Soft Sales A Concern

Leading food processing company, Archer-Daniels-Midland Company (NYSE:ADM) remains focused on strengthening its business through increased cost savings, a key component of its long-term strategy. However, the company’s murky sales surprise history due to lower sales at all segments remains a woe.

Growth Drivers

Cost-Savings Plan

We note that Archer Daniels’ cost-savings initiatives remain well on track. In fact, the company is running ahead of schedule with its savings target of $225 million for 2017. Management targets $550 million in additional run rate cost savings over the next five years that includes cost savings of $350 million from operational excellence and process enhancements, and about $200 million in incremental purchasing savings.

Driven by its strategic initiatives like making meaningful acquisitions, undertaking organic growth projects and efficiently managing portfolio, the company generated run-rate savings of nearly $130 million in the first half of 2017. Additionally, Archer Daniels remains focused on cost synergy activities by addressing redundancies and removing overlapping corporate SG&A.

Project Readiness Bodes Well

Notably, Archer Daniels has long been enhancing its operational efficiency at its production and supply chain networks in order to curtail costs. Further, the company has been on track with its business transformation, under its 1ADM program.

Also, management announced plans to converge both the aforementioned activities into a single strategic plan called Project Readiness, in 2017. Going forward, the company anticipates this project to help management have a more coordinated approach toward driving business improvement, standardizing functions and enriching consumers’ experience. In fact, as a part of this plan, Archer Daniels intends to allocate resources efficiently on more mature businesses, thus making a prudent business investment.

Other Strengths

Archer Daniels has been undertaking several strategic initiatives to manage its business portfolio. These initiatives are expected to help the company realize value and invest the same in the best possible resources to enhance returns.

Moreover, the company has been continuing with its investment activities for business growth. In sync with this, it shifted from domestic projects – where returns are difficult to model – to international projects that can be tracked more easily and will be accretive at a faster pace.

Markedly, Archer Daniels, which shares space with Limoneira Company (NASDAQ:LMNR) , Calyxt, Inc. (NASDAQ:CLXT) and Calavo Growers, Inc. (NASDAQ:CVGW) , has always maintained a disciplined capital allocation strategy. This reflects the company’s prudent investments to develop its business, while using the excess cash to enhance shareholder returns through dividend payouts and share buybacks.

Concerns/Headwinds

Though Archer Daniels’ actions bode well, it has a dismal sales surprise history as the top line has lagged the Zacks Consensus Estimate for over three years now. Furthermore, the company has delivered negative earnings surprise in seven of the last nine quarters. This drab performance history can be attributed to the fluctuating commodity prices, oversupply in the industry and unfavorable margins.

Additionally, management expects exports from Argentine to continue pressing margins at the Oilseeds segment in the third quarter, when the global environment is expected to remain highly competitive. Also, we remain worried about Harvey's impact on the Archer Daniels' performance.

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