Watchdog accounting probe could not come at a worse time for ADM
• SEC investigation of lucrative nutrition segment creates uncertainty just as crop prices fall and soya crushing margins thin
An investigation of accounting practices in the nutrition segment of Archer-DanielsMidland (ADM) could not come at a worse time for the company as sinking crop prices look set to erode profit for its core grain trading and processing businesses in 2024.
Before news of the accounting issues broke and sent ADM’s share price tumbling 24% on Monday, the biggest fall since 1929 according to the Center for Research in Security Prices, the company had been forecasting the nutrition unit it expanded for much of the past decade would return to profit growth in 2024.
On Monday, the global grains merchant cut its 2023 profit forecast and said its fourthquarter results would be delayed due to the investigation related to inter-segment transactions flagged by the US Securities and Exchange Commission (SEC). It also put CFO Vikram Luthar on administrative leave
The SEC did not respond to a request for comment. “It is now uncertain whether nutrition operating profits will return to [year-on-year] growth in 2024,” said Arun Sundaram, senior equity analyst at CFRA Research. “We expect the investigation and uncertain outlook to cast a shadow over ADM’s shares, as the nutrition segment was once the fastest-growing and most profitable segment,” he said.
CFRA cut its 12-month price target for ADM to $61 a share from $76 previously, one of several analysts that downgraded ADM share targets on Monday.
Analysts said that a recovery in the nutrition business segment, which generated about 11% of profit for ADM in 2022, would have helped cushion the blow from thinning margins in soya bean crushing and ethanol, and from lower crop prices as global supplies of maize and soya rise.
ADM and its crop processing and trading rivals cashed in on historically wide soya crushing margins over the past two years due to strong demand for vegetable oil to make biofuel and reduced soya product supplies from drought-hit Argentina. Those margins are now thinning due to expanded US processing capacity and a projected crop rebound in Argentina.
Meanwhile, margins for producing ethanol biofuel, a cornerstone of ADM’s portfolio, have narrowed and a global grain glut has curbed crop exports from the US, home to the bulk of ADM’s operations.
ADM cut its adjusted earnings forecast to $6.90 a share for 2023 from an “excess of $7 a share” and withdrew all its forward-looking outlooks for the nutrition segment.
ADM has invested billions of dollars in it over the past decade, starting with its $3bn acquisition of Wild Flavors in 2014. In that time, annual adjusted earnings per share ballooned from $2-$3 to a record $7.85 in 2022.
ADM executives frequently say the segment is the future of the company, aiming to capitalise on healthier eating trends and rising consumer demand for natural ingredients and flavourings. The unit also provides more earnings stability as company results are tied less directly to the highly cyclical commodities market.
It is unclear if two recent nutrition unit acquisitions due to close early in 2024 will be affected. ADM announced the purchase of Revela Foods, a Wisconsin-based developer and manufacturer of dairy flavour ingredients, and UK-based flavour and ingredient firm FDL late in 2023.
Analysts also struggled to gauge future returns for the nutrition segment.
“If we can’t rely on the financial statements, it’s hard to judge the return that they are getting for all these acquisitions if there is going to be a massive restate of profits that affects multiple years,” said Seth Goldstein, strategist with Morningstar.