A Soy Story: Citi Upgrades Grain Processors Archer Daniels, Bunge

Grain processors are coming off a difficult 2017 due to an excess supply of soymeal from Argentina flooding the global market. Argentina is now in a drought, and soy production in the country is likely to fall by 8.8 million tonnes year-over-year in 2018 to 49 million tonnes, according to Citi. This could benefit American companies: Archer Daniels Midland Co ADM and Bunge Ltd BG

The Analyst

Citi's David Driscoll upgraded Archer Daniels' stock rating from Neutral to Buy with a price target boosted from $45 to $49. The analyst upgraded Bunge's stock rating from Neutral to Buy with a price target lifted from $75 to $89.

The Thesis

The ongoing drought in Argentina implies improving soybean margins in the global market, which naturally serves as a positive tailwind for companies like Archer Daniels and Bunge, Driscoll said in a Tuesday note.

Soymeal prices have risen in the past two months, which helped boost soy crushing margins on both the futures and physical markets, the analyst said. 

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Archer Daniels

Throughout 2017, Archer Daniels crushed close to 35 million tonnes of oilseeds, Driscoll said. Every additional 10-cent-per-bushel improvement in oilseed crush margins will benefit its annual EPS by 18 cents per bushel, the analyst said. This comes at a time when Archer Daniels' 2017 return on invested capital of 6.4 percent fell short of its 9-percent target. 

The Chicago-based food processor is likely to see improved ROIC trends in 2018, which should help drive a 26 percent year-over-year earnings per share growth to $3.05, which should further expand to $3.65 by 2020, according to Citi. 

Bunge

Bunge's earnings are sitting at "depressed levels" given a 4.4-percent ROIC in 2017, the analyst said. This could be attributed to the company being hit hard by poor crush margins in South America and weak South American grain merchandising, he said. 

Similar to Archer Daniels, Bunge's outlook for 2018 is likely to improve on the basis of a smaller South American crop. Bunge has "significant room" for growth before realizing normalized earnings, and its ROIC can move as high as 9 percent, Driscoll said. 

Bunge is also considered to be a potential takeout candidate, and a takeout offer would value the company at $85 to $100 per share, Citi said. 

Price Action

Shares of Archer Daniels were up nearly 1 percent at $43.12 at the close Tuesday, while shares of Bunge were lower by 1.13 percent at $77.11. 

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