Archer Daniels Midland Company (ADM), Hershey Co (HSY): Will Cutting Down on Chocolates Make for Healthy Investing?

First, here’s a disclaimer of sorts. This piece cites tempting chocolate confectioneries, which can lead to weight issues that agricultural commodity processor Archer Daniels Midland Company (NYSE:ADM) is addressing nowadays.

On June 21, Archer Daniels Midland Company (NYSE:ADM) said it is negotiating to sell its estimated $2 billion cocoa business, though it didn’t identify with whom it is talking with. What is certain, however, is that major confectionery producers are waiting to learn how such negotiations will pan out. Archer Daniels Midland Company (NYSE:ADM) has an extensive cocoa operation, which includes 26 cocoa-processing plants worldwide. Notably, the Archer Daniels Midland Company (NYSE:ADM) announcement comes on the heels of the $1 billion acquisition of the cocoa operations of the Singaporean group Petra Foods by the Swiss company Barry Callebaut, already the biggest manufacturer of industrial chocolate.

Cocoa woes to watch

Disruption to the cocoa supply chain and higher costs remain a concern for confectionery firms. True, the cocoa price has moderated to $1.07 per pound average in 2012 from a record high of $1.55 per pound in 2011. However, the $33 billion U.S. candy maker Mars, iconic for its M&M and Snickers, believes the world’s sustainable cocoa supply could start to run out as early next year.

As a proactive move, this privately held company as well as Hershey Co (NYSE:HSY) and Mondelez International Inc (NASDAQ:MDLZ), have launched separate campaigns to help boost cocoa farm output. These initiatives are focused in the biggest growing countries in West Africa where cocoa plantations are less organized.

Any instability there can cause supply disruption and skyrocketing prices. This can lead to the possibility of a squeeze on profitability for confectioneries, which are averse to raising retail prices that could jeopardize their market share.

For now, though, sales appear rosy for the chocolate makers as they gird for their busiest sales season, Halloween. Driven by volume growth, Hershey Co (NYSE:HSY)’s 2013 first quarter net sales amounted to $1.8 billion, up 5.5%. Net income hit $241.9 million or $1.06 per diluted share, up from $198.7 million or $0.87 per diluted share a year earlier. In the 2013 first quarter, Mondelez International Inc (NASDAQ:MDLZ) had net revenue of $8.7 billion and its organic net revenue rose 3.8%. Its diluted EPS amounted to $0.32, and its operating EPS at $0.34 was 22.6% higher.

Market welcomes ADM shift

With such large stakes in the cocoa industry, it may come as a puzzle as to why Archer Daniels Midland Company (NYSE:ADM) is eyeing a way out of the cocoa business. Recent company results can partly explain why. Depressed cocoa margins and the adverse impact of the U.S. drought last summer resulted in lower earnings for the company’s 2013 first quarter. Net earnings for the period amounted to $269 million, or $0.41 per share, compared with $399 million, or $0.60 per share a year earlier.

Notably, too, the cocoa business contributes only a relatively small portion to Archer Daniels Midland Company (NYSE:ADM)’s earnings. For 2012, the segment had $57 million operating profit, down from $183 million in 2011. It contributed just 7% to the operating income of the company.

This drag on income and underlying cocoa industry issues provided positive undertones for the June 21 announcement of the ADM cocoa segment’s sale. Following the report of planned divestment, the company’s share price rose by 1.5% or $0.48 to $33.09 with close to 6.3 million shares changing hands, one of its busiest trading days so far this year.

Healthier dose from Aussie grain

This planned sale appears in synch with the looming ADM takeover of GrainCorp, a leading Australian grain handler and oilseed processor. ADM is offering GrainCorp, cash payment of A$12.20 per share plus permitted dividends of A$1.00 per share. GrainCorp’s board has recommended that shareholders accept this bid

ADM appears on the right path in its plan to divest its flagging cocoa business and to pursue the GrainCorp takeover. This Australian firm offers excellent strategic fit to ADM’s global footprint encompassing 140 countries. The top grain handler in Eastern Australia, GrainCorp has more than 280 origination locations and nine port terminals, including seven for bulk grains. Besides being a leading grain exporter from Australia, it is the second largest oil-seed crusher in the country and the largest refiner/packager of edible fats and oils in Australia and New Zealand.

Final take

Summing it up, shedding the weight of its cocoa segment and focusing on  consumer-staple grains should be positive signs for ADM and investors. With a current yield of 2.3% and an annualized dividend of $0.76, the company is also nearing its 10-year streak of dividend payouts. By this metric, it is the farm products industry leader. Coupled with ADM’s trailing-12 month P/E ratio of around 18, ADM should make an appreciable pick for value investors whose stock portfolio are yet blank on agribusiness equities.

The article Will Cutting Down on Chocolates Make for Healthy Investing? originally appeared on Fool.com.

Arturo Cuevas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Arturo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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