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What Challenged Archer Daniels Midland’s Results in 1Q16?

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1Q16 performance declined

Before we discuss the estimates for Archer Daniels Midland’s (ADM) upcoming 2Q16 results, let’s do a recap of its 1Q16 performance. The company didn’t have a great start to 2016. Earnings fell 45% YoY (year-over-year) in the first quarter. The adjusted EPS came in around $0.42 for the first quarter—compared to $0.77 in fiscal 1Q15. Challenging market conditions and global dynamics had an impact on the results in the first quarter. The Agricultural Services segment had a weak quarter. Low US export volumes, poor results from the Global Trade Desk, and thin margins impacted the results for this segment.

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What caused revenue to decline?

The company’s revenue fell 18% YoY to $14.38 billion in the first quarter. The revenue in the same quarter the previous year was $17.5 billion. Sales also missed estimates by 15%. The overall results were disappointing due to a decline in revenue in all of Archer Daniels Midland’s operating segments. Also, 1Q16 wasn’t favorable for the Agricultural Services segment. It accounted for almost 45% of Archer Daniels Midland’s revenue.

It fell 19% to $6.4 billion—compared to $8.04 billion in 1Q15. The decline was driven by fewer global merchandising and transportation opportunities, North American export volumes and margins, and unfavorable Global Trade Desk merchandising positions. Lower softseed crush volumes and weaker Brazilian commercialization that slowed throughout the first quarter caused the Oilseeds Processing segment’s revenue to fall by 21%. The Corn Processing segment and the WILD Flavors segment also fell 11% and 2% YoY.

Margins fell in 1Q16

Global dynamics impacted the margins across the US agricultural export sector, the US ethanol industry, and the global soybean crushing industry. The company’s margins have been falling for the past few quarters and continued falling in the first quarter.

Archer Daniels Midland’s peers in the industry include McCormick & Company (MKC), Flowers Foods (FLO), and WhiteWave Foods (WWAV). They saw gross margins of 40.7%, 46.8%, and 34.0%, respectively, in their last reported quarters.

To gain exposure to McCormick & Company, you can invest in ETFs like the PowerShares Dynamic Food & Beverage Portfolio (PBJ) and the Guggenheim S&P 500 Equal Weight Consumer Staples ETF (RHS). PBJ and RHS invest 2.8% and 2.6% of their respective portfolios in these stocks.

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