ADM’s Stock Falls as CFO is Investigated and Profit Prediction is Reduced

Shares of the renowned global grains merchant Archer-Daniels-Midland (ADM) took an alarming nosedive on Monday, plummeting by a staggering 24% in a single day, marking its largest one-day drop since the catastrophic market crash of 1929. The abrupt decline came in response to the company’s decision to place its Chief Financial Officer (CFO) Vikram Luthar on administrative leave, pending an investigation into alleged accounting irregularities within the company’s Nutrition segment.

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The ADM Nutrition segment has been facing growing challenges, primarily due to sluggish demand for meat alternatives and other related products, along with operational disruptions at a significant soy processing facility. These factors have cast a shadow of uncertainty over this once high-margin division of the company.

The ongoing investigation, triggered by a voluntary document request from the United States Securities and Exchange Commission (SEC), has prompted ADM to slash its profit forecast for 2023 and delay the release of its fourth-quarter results. The inquiry specifically revolves around certain inter-segment transactions within the organization. In response to these developments, ADM has expressed its willingness to fully cooperate with the SEC.

ADM’s stock closed at a significantly reduced price of $51.69 per share, the lowest since February 2021, underscoring the impact of this crisis on investor sentiment. In fact, it marks the largest one-day percentage decline for ADM shares since the aftermath of the 1929 market crash, according to data from the Chicago-based Center for Research in Security Prices.

Regarding the investigation, the SEC has yet to respond to requests for comment from Reuters. Meanwhile, ADM has affirmed its commitment to support the ongoing inquiry in collaboration with the regulatory authority. It is important to note that Vikram Luthar has been associated with ADM for nearly two decades, having served in various leadership roles before assuming the position of CFO in 2022.

 

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Despite ADM’s recent solid track record of delivering record earnings, bolstered by favorable crop processing margins and robust demand for food, animal feed, and biofuel, the Nutrition segment has seen lackluster performance in recent quarters. This particular division is responsible for supplying crucial ingredients such as plant-based proteins, natural flavors, and emulsifiers to industries including food, beverage, and nutritional supplements.

Analysts have identified recent investments made by ADM in the animal feed and pet nutrition sectors as underperforming, contributing to the downward pressure on the company’s stock. Following the SEC’s document request, at least four brokerages have downgraded ADM’s stock, impacting market sentiment and further exacerbating the situation. As a result, the company had to revise its adjusted earnings forecast downwards to $6.90 per share for the fiscal year that ended in December 2023 from its previous estimate of “excess of $7 a share.”

 

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Goldman Sachs analyst Adam Samuelson emphasizes the need to fully understand the extent of the potential accounting issues and their impact on the Nutrition segment’s revenues and margins. Addressing these concerns and providing clarity will be vital to ADM’s ability to navigate through this challenging period.

In recent years, ADM has strategically sought to diversify its operations by expanding its flavors and nutrition business, aiming to mitigate the volatility caused by commodity price fluctuations. With the acquisition of WILD Flavors in 2014 for $3 billion and the more recent announcement of its intention to acquire the UK-based flavor and ingredient firm FDL, ADM demonstrated a strategic focus on strengthening its position in this sector.

While there are significant uncertainties surrounding the current investigation and its implications for ADM’s financial performance, analysts at BMO suggest that if the issue at hand solely pertains to transfer pricing and tax avoidance, it should not have a severe impact on the company’s earnings outlook for 2024. BMO analysts highlight the possibility for ADM to continue buybacks and execute its recent acquisitions as planned, despite the ongoing investigation.

 

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As investors wait for more clarity regarding the accounting irregularities in ADM’s Nutrition segment, industry experts suggest alternative investment options such as shares of Darling Ingredients and rival grain merchant Bunge Global. These companies may benefit from the market’s shifting sentiment towards safer investment opportunities.

Following the temporary removal of Vikram Luthar as CFO, ADM has appointed Ismael Roig, a longstanding member of the organization since 2004, as the interim CFO. This move aims to ensure stability and restore confidence amidst this tumultuous period.

Disclaimer: The content presented in this article is for informational purposes only and should not be considered financial advice.

 

Source:reuters.com

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