This "look-ahead" post discusses how I came up with an estimate for Archer Daniels Midland's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.
Once the company’s official results become available on February 2, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative. Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.
But, before we get into the details, let's take a step back and start with background information about ADM.
Chicago-based ADM is a global agribusiness that purchases, transports, stores, processes, and merchandises agricultural commodities (including oilseeds, corn, and wheat) and products (such as vegetable oils, flour, other food ingredients, livestock feed, and biofuels). In the first quarter of 2019, ADM acquired Neovia and Florida Chemical Company as it seeks to become one of the world’s "leading nutrition companies." Separately, ADM is creating an independent ethanol subsidiary that it may eventually sell or spin-off.
Shares of ADM now trade for about $51 each. These shares can be found in the Standard and Poors 500, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 stock indices.
ADM recorded profits of $2 billion on revenue of $63 billion during the last year. In the quarter that ended on 30 September 2020, ADM earned $0.89 per share (excluding certain items), which significantly beat the $0.71 Wall Street consensus forecast. See https://tinyurl.com/y5v988oj for ADM's most recent quarterly report.
Revenue in the September 2020 quarter totaled $15.1 billion, 10% less than last year's $16.7 billion. The Agricultural Services and Oilseeds business was responsible for 76% of overall revenue, and this unit's revenue fell by 8.6% compared to the year-earlier result. The Carbohydrate Solutions business contributed 14% of revenue, and this unit's revenue fell by 19.5%. The Nutrition unit supplied 10% of revenue, and the amount was essentially unchanged from the year-earlier period.
My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts. It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling. I also look for other information about the company in the news, and I take advantage of trends in the company's historical results. While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP). Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.
ADM management communicated some expectations for the December 2020 quarter during the conference call with financial analysts after the company announced its third-quarter results last October. A few relevant excerpts follow:
Looking ahead, we expect to see strong North American exports and global crush margins in the fourth quarter, combined to contribute to a very strong Ag Services and Oilseeds performance, with results significantly higher than the third quarter of this year, though lower than Q4 of 2019, which included a $270 million benefit for 2 years of the retroactive biodiesel tax credit.
Looking ahead, we expect the fourth quarter for Carbohydrate Solutions to be close to Q3 of this year and substantially higher than the fourth quarter of 2019, driven by improved year-over-year fuel ethanol margins and higher industrial-grade sales. While Sweetener and Flour volumes will still be impacted by weaker food service demand, we expect the year-over-year percentage decline to be smaller than it was in Q3.
Looking ahead to the fourth quarter, we expect nutrition to deliver another quarter of 20-plus percent year-over-year OP growth with a typically seasonally weaker Q4 in Human Nutrition, offset by seasonally stronger Animal Nutrition
The guidance above, if I'm interpreting it correctly, suggests that ADM's Segment Operating Profits for the fourth quarter may be in the ranges listed below.
Corporate results that subtract from Segment Operating Profit averaged $400 million per quarter during the first nine months of 2020. If the fourth quarter turns out to be similar, Income before Taxes could be $380 to $540 million.
It's not the ideal analytical approach but, lacking other definitive information, I played around with the Income Statement to get Income before Taxes to equal $460 million (midpoint of the range above), while keeping each line more or less consistent with the company's historical results. The result was an estimate for earnings of $413 million ($0.73 per share).
Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.
#adm #archerdanielsmidland #gauges #gcfr #gcfr2 #lookahead #nac_financialanalysis
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