Archer Daniels's stock rises as it completes accounting probe, removing an overhang for the stock

By Ciara Linnane

Agricultural giant's quarterly earnings fall short of estimates but guidance is upbeat

Archer Daniels Midland Co.'s stock rose 4.5% on Tuesday, after the Chicago-based agricultural giant said it has substantially completed the internal investigation of accounting at its nutrition business that was first disclosed in January.

The adjustments it now needs to make will not have a material impact on its overall financial statements, the company said, removing an overhang on the stock.

The accounting probe came after a voluntary document request by the Securities and Exchange Commission. The news sent the stock down 22% to mark its worst-ever single-day decline when it was disclosed. The company placed its finance chief Vikram Luther on immediate administrative leave as it investigated intersegment transactions.

In its 10-K annual report filing with the SEC on Tuesday, the company (ADM) said the Justice Department directed grand jury subpoenas to certain current and former employees. It's continuing to cooperate with both the SEC and Justice Department on the matter.

Historically, Archer Daniels has disclosed in the footnotes to its financial statements that intersegment sales were recorded at amounts approximating the market. However, the investigation found that certain sales that occurred between its nutrition segment and ag services and oilseeds and carbohydrate solutions were not recorded based on market prices.

"Because intersegment sales occur between the company's reporting segments, the adjustments have no impact on the company's consolidated balance sheets and statements of earnings, comprehensive income (loss), or cash flows," the company said in a statement.

Archer Daniels has now developed a remediation plan relating to the identified material weakness that will improve the reliability of its financial statements.

The nutrition segment, once touted by executives as the future of the company, produces flavors and colors, specialty ingredients and nutritional supplements.

In 2023, the business faced a struggling plant-based protein market, an explosion at a soybean processing plant that impacted production and a restructuring of the animal nutrition unit.

On a call with analysts to discuss fourth-quarter earnings that were also released on Tuesday, Chief Executive Juan Luciano said the company is working to turn around the nutrition segment, and has started with steps to simplify its supply chain.

"In our zeal to meet our customers' needs, we have created one of the strongest pantries in the industry," he said, according to a FactSet transcript. "This added complexity in our operations and supply chain that at times impacted our ability to efficiently fulfill demand."

The company has created a stronger division of duty across operations leadership, adding leaders with expertise in supply-chain management. It has engaged experts to identify further opportunities to improve operations at its largest facilities and simplified its product and production lines. That included closing more than 20 animal-nutrition-production lines in 2023.

The company posted net income of $565 million, or $1.06 a share, for the fourth quarter, down from $1.019 billion, or $1.84 a share, in the year-earlier period. Adjusted for one-time items including a 30-cent impairment and restructuring charge, the company's per-share earnings came to $1.36, below the $1.43 FactSet consensus.

Revenue fell to $22.978 billion from $25.939 billion a year ago, also below the $23.786 billion FactSet consensus.

The nutrition segment had an operating loss of $10 million in the quarter, after income of $105 million in the year-earlier period.

The company is now expecting 2024 adjusted EPS of $5.25 to $6.25, while FactSet is expecting $5.41.

The nutrition segment is expected to deliver mid-single-digit revenue growth and operating income that's higher versus 2023.

The board has added an additional $2 billion to its share-buyback authorization.

CFRA upgraded the stock to buy from hold and raised its 12-month price target to $67 from $61.

Analyst Arun Sundaram said macro conditions are normalizing after several years of elevated crop prices and supply chain disruptions.

"We expect 2024 to be the trough from an earnings perspective, as ADM still feels comfortable about the 2025 targets it set back in 2021," Sundaram said in a note to clients.

"The update provided today on the intersegment accounting issue was better than feared, which we believe will remove a major overhang on the shares."

The stock has fallen 25% in the last 12 months, while the S&P 500 has gained 32.5%.

-Ciara Linnane

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03-12-24 1328ET

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