Archer-Daniels Midland Earnings: Ag Services Business Remains Strong While Nutrition Falters

After updating our model to incorporate Archer-Daniels Midland’s ADM second-quarter results, we maintain our $70 per share fair value estimate. Our no-moat rating is also unchanged.

ADM’s stock was up slightly on the day as management raised its full-year adjusted earnings per share guidance to $7, from the prior midpoint of $6.50. At current prices, we view ADM shares as overvalued, with the stock trading around 20% above our fair value estimate and in 2-star territory.

In the near term, ADM’s ag services and oilseeds business, or AS&O, should continue to benefit from crop prices at above midcycle conditions, which should support increased farmer selling. While this should help ADM generate above-midcycle profits in the AS&O segment, we see profits down slightly versus the peak of 2022. As crop prices moderate, we expect the AS&O businesses profits will moderate as well, leading profits to fall back to midcycle levels over the long-term

While the AS&O business is generating strong profits, the nutrition business continues to falter, with a third straight quarter of year-over-year double-digit profit declines. The weakness is largely due to profit declines in the animal nutrition business amid falling amino acid profits and slowing feed demand. Additionally, while the flavors business is growing in human nutrition, plant protein demand is slowing, further weighing on segment profits. Management revised its guidance for nutrition profits to be flat in 2023, versus the 2022 level of nearly $740 million, but still remains confident in its 2025 segment profit target of $1.25 to $1.5 billion. However, given that ADM is cutting the size of its animal nutrition business, we think the slowing demand will likely remain in place. Accordingly, we’re skeptical of management’s 2025 profit targets, absent additional acquisitions.