ADM Operating Profits Continue To Grow

Once again the MSM coverage skews actual results…This time they do it to Archer Daniels Midland (ADM)

The headlines “ADM Profits Falls” and “Archer Daniels fourth-quarter profit slips by more than half” are as misleading as they come. Why?

What do we really care about? The health of operations. ADM’s profit of $3.30 a share last year was boosted $1.01 by asset sales. That means actual operations, what is does to make money, had a profit of $2.30 a share. This year, operations posted a profit of $2.79 a share. That is growth… Just as we tend to discount “one time” charges when they hurt earnings, we should do the same when they help and focus on core results.

Earnings call notes:

– 90% of the increase (in net sales and profits) was attributable to increases in selling prices, primarily resulting from the significant increase in underlying commodity costs. The remaining 10% of the increase in sales revenue was due to higher sales volumes.

This is important because it signals higher selling prices are sticking and not hurting demand. ADM is coming off a year of record demand and it increased, along with prices in the current one.

Along with this was that gross profit grew approximately 12% for the quarter to $807 million, as overall operating margins improved. In short, higher commodity costs are not hurting results.

– ADM expects to see higher selling prices for ethanol in this current quarter that we are in compared to last quarter and shipments should remain at a good pace. As current market prices for ethanol remains very attractive relative to unleaded gasoline.

Here was an interesting comment that came out of a question of what ADM will do in regards to debt repayment vs share buybacks:
“The agencies, of course, discourage share buy backs, but we still have some commodity volatility. We have our ongoing CapEx program that’s got a little more than a year to kind of run out. We’re kind of at the peak spending period as we stand here. And we see some good M&A opportunities out there that we’re evaluating each and every day.”

M&A is almost never mentioned on an ADM call in any way. The fact that the subject was broached in this way gives real credence to last weeks reports that ADM is planning to announce something in Brazil very soon.

Ethanol mandate:
“We’re already blending over the mandate right now. Ethanol is a lot cheaper than unleaded gasoline. So everybody is going to be trying to expand and blend as much as they can. So even if there is a waiver, which really doesn’t make much sense, we still do not see the ethanol demand slowing down at all, just because it is very price competitive.”

On the increased ethanol supply coming on;line:
Diane Geissler – Merrill Lynch: “In terms of picking up (demand) the incremental supply that’s scheduled to come online over, say, the next 12 months?”

John Rice: “Yes. We keep seeing new markets come in and as ethanol is $0.60 to $1 under unleaded gasoline, more and more people keep blending it and using it.”

Ethanol Tariffs:
“There is a lot of talk about the tariffs, but logistically, Brazil is just not set up to handle and ship any more ethanol than they already are. I mean we have the infrastructure issues, we are very involved in the Brazil infrastructure. Probably over the long term, that can change, but it also comes down to just a revenue issue, doing away with the tariff, it’s just less revenue in the United States because X amount of gallons will come to the United States one way or the other.” John Rice

All in all as an investor, there wasn’t anything that alarmed me a a whole lot that was encouraging. Capex will peak in 2009 as new processing plants begin to come online ans that will further boost earnings. Brazil will open up and there does not seem to be anything (other than the media) stopping the blending of ethanol into gas with or without the tariff. People still need both food and fuel and until they don’t ADM will be just fine.

SEC filing

Disclosure (“none” means no position):Long ADM

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