Idea Of The Week: Archer Daniels Midland Earnings May Be Hurt By Low Oil Prices

The strong U.S. dollar means that U.S. exports seem more expensive outside the U.S., and that has led to a fall in demand for U.S. goods, including agricultural products. That is likely to hurt earnings at Archer Daniels Midland Co. (ADM.N), the Chicago-based global food-processing and commodities-trading corporation.

To compound the problems, the Brazilian real has devalued, which means that Brazil is benefiting at the expense of U.S. companies. Another pain point for ADM is low oil prices, which have kept a lid on the demand for ethanol. All that will likely lead to poor earnings this quarter, and the negative StarMine Predicted Surprise of 3% leads us to believe that they may even miss the already-lowered earnings estimates.

Source: Thomson Reuters Eikon/StarMine

Food for thought

Analysts have taken estimates down over the past 90 days by more than 10 cents per share. The I/B/E/S consensus estimate is now 70 cents per share. The SmartEstimate which has remained below the consensus throughout this period still remains two cents below the consensus at 68 cents per share. Falling oil prices and the strong U.S. dollar has led three 5-star analysts to have Bold Estimates that are far below the consensus. When so many 5-star analysts are so far below the consensus, we pay attention.

Source: Thomson Reuters Eikon/StarMine

Digesting lowered estimates

The chart above shows that year over year revenues have been falling at ADM for the last nine quarters, and the pace of the decline has been accelerating over the past four quarters. With increased competition from Brazil because of the weak real, and poor ethanol margins amid low oil prices, revenues could remain subdued. In fact, analysts have lowered revenue estimates for next year by 8% in the last 90 days.

It looks like ADM earnings are facing some headwinds, but they did make some strategic acquisitions and are expanding their customer base globally. President and CEO Juan Luciano stated on the last earnings call that he expects demand for the U.S. crop to surge with the harvest in the second half of the year. Whether that pans out remains to be seen and that could help earnings in the future, but for the current quarter, StarMine indicates an earnings miss.