ADM Is a Bio-Player

August 3, 2006

by Stephen D. Simpson, CFA, Motley Fool

“I’m not a playa, I just crush a lot” — Big Punisher, “Still Not a Player”

Crushing is really what it’s all about for Archer Daniels Midland (NYSE: ADM) — crushing and processing oilseeds into vegetable oils and biodiesel, crushing and processing corn into high fructose sweeteners, starches, and ethanol. And better margins on crushing meant that ADM put some squeeze on expectations as well — while revenue growth wasn’t as strong as predicted, earnings were higher.

Revenue this quarter was up a whopping 1%. The real magic, then, was in the margins. Gross margins improved by about three full percentage points and that was enough to fuel more than a doubling of operating income as segment profits rose 82%. Speaking again of crushing, the crush margin jumped 25% from last year and that’s certainly a help.

For the time being, lots of things are going in ADM’s favor. Companies like Coca-Cola (NYSE: KONews) and PepsiCo are paying more for high fructose corn syrup and companies like ADM and Corn Products are gradually seeing better access to Mexico and its huge soft drink market. And then there is the biofuel play that we all have heard so much about already, and the higher prices for ethanol and biodiesel.

ADM is certainly doing its part to stay at the front of the biofuel business. Based upon plans already underway, it looks like U.S. ethanol capacity will roughly double by 2008. By the same token, that means only about 7 billion gallons of ethanol versus the 140 billion gallons or so of gasoline that Americans currently consume in a year. So while I’m not certain that companies like ADM or Bunge (NYSE: BGNews) will necessarily reap a windfall from ethanol, it definitely has the makings of a real business.

In the meantime, it’s still all about managing the margins at ADM. If end product prices stay high and the company controls its own costs, there’s a lot of leverage that can be reaped from close to $40 billion in annualized sales. By the same token, don’t forget that this is a company surrounded by volatility — energy prices are volatile (both as cost and a finished product), crop prices and supplies are volatile, and investor enthusiasm for biofuel plays has also proven to be volatile.

Coca-Cola is an Inside Value recommendation.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he’s neither long nor short the shares).Source: Yahoo

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One Response to “ADM Is a Bio-Player”

  1. Matt said

    That’s the radio friendly version of that quote.

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