Highlights of the week of August 4, 2014

Dear PGM Capital Blog readers,

In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of August 4, 2014.

• Q2-2014 earnings report of Archer Daniel Midland Company.
• Nestle announced CHF 8 billion share buy-back program.
• Rio Tinto reports H1-2014 earnings report.

ARCHER DANIELS MIDLAND Q2-2014 UP 67.4 PERCENT:
Archer Daniels Midland Company (NYSE: ADM) is an American global food-processing and commodities-trading corporation, headquartered in Decatur, Illinois, USA. 

The company operates more than 270 plants and 420 crop procurement facilities worldwide, where cereal grains and oilseeds are processed into products used in food, beverage, nutraceutical, industrial, and animal feed markets worldwide.

On Wednesday, August 6th, the company reported – adjusted for certain items – a profit of 77 cents per share, up 67.4%, from 46 cents posted in the year-ago comparable quarter.

Based on these blockbuster results the shares of this agri-business giant surged with 4.74% in the week to close at an all time high of US$49.04 a share on Friday, August 8, 2014 as can be seen from below chart.

Q2-2014 Highlights:

• Adjusted EPS of US$0.77 excludes approximately US$73 million in pretax LIFO income.
• Oilseeds Processing increased US$18 million.
• Corn Processing increased US$69 million on strong ethanol demand and steady sweetener volumes.
• Agricultural Services increased US$122 million, driven by strong U.S. exports and significantly improved results from international merchandising.
• The net debt position of the company declined to US$3.6 billion, compared to US$5.5 billion in the same period last year.
• The company repurchased 7.2 million shares during the quarter, bringing year-to-date buybacks to 11.5 million shares for about US$500 million.
• Board of Directors today declared a cash dividend of 24.0 cents per share on the company’s common stock payable September 11, 2014, to Stockholders of record August 21, 2014.

NESTLE CHF 8 BILLION SHARE-BUY BACK PROGRAM:
Nestlé S.A. (SIX: NESN) is a Swiss multinational headquartered in Vevey, Switzerland, is measured by revenues, the world’s largest food company.

The company’s products include baby food, bottled water, breakfast cereals, coffee and tea, confectionery, dairy products, ice cream,frozen food, pet foods, and snacks. Twenty-nine of Nestlé’s brands have annual sales of over 1 billion CHF (approx. 1.1 billion US-Dollars).

In the first half of 2014, the Group delivered organic growth of 4.7%, composed of 2.9% real internal growth and 1.8% in pricing. Total sales were CHF 43 billion. The strong Swiss Franc continued to have a substantial negative impact (-8.8%) and after divestitures, net of acquisitions(-0.7%), reported total sales were down by 4.8%.

H1-2014 Highlights:

• The Group’s trading operating profit was CHF 6.4 billion. The reported trading operating profit margin was 15.0% (-10 basis points), +30 basis points in constant currencies.
• The cost of goods sold increased by 20 basis points, reflecting input cost pressures, especially in dairy.
• Total marketing and administrative costs decreased by 30 basis points, reflecting efficiencies. At the same time they continued to strengthen the support for their brands, increasing consumer facing marketing spend in constant currencies.
• Net profit was down to CHF 4.6 billion, reported earnings per share were CHF 1.45, both impacted by the strong Swiss Franc. Underlying earnings per share in constant currencies were up 3.6%.
• Operating cash flow was CHF 4.3 billion. Working capital remains an area of focus and they have continued to lower it as a percentage of sales.
• They plan to launch a new share buy-back programme of CHF 8 billion that will start this year and continue into 2015. The buy-back is subject to market conditions and strategic opportunities. 

RIO TINTO H1-2014, EARNINGS UP 21 PERCENT:
The Rio Tinto Group is a British-Australian multinational metals and mining corporation with headquarters in London, United Kingdom, and a management office in Melbourne, Australia.

The company, which is the world’s second biggest mining company, has operations on six continents but is mainly concentrated in Australia and Canada.

On Thursday, August 7th, the company reported its H1-2014 earnings report with the following highlights:

H1-2014 Highlights:

• Increased underlying earnings by 21 percent to US$5.1 billion. Underlying earnings per share rose to 276.8 US$ cents.
• Achieved US$3.2 billion of sustainable operating cash cost improvements since 2012, exceeding the US$3 billion reduction target six months ahead of schedule.
• Shipped record iron ore volumes, set production records for iron ore and thermal coal and delivered a strong operational performance in copper.
• Increased cash flows from operations by eight percent to US$8.7 billion.
• Reduced capital expenditure to US$3.6 billion in the first half. 
• Decreased net debt by US$1.9 billion in the first half to US$16.1 billion on 30 June 2014. 
• Achieved EBITDA of US$1.1 billion in Aluminum, up 26 percent on 2013 first half, despite London Metal Exchange (LME) aluminum prices averaging nine per cent lower.
• Increased interim dividend by 15 percent to 96 US cents per share, payable on September 11, to shareholders on record on August 15, 2014

PGM CAPITAL COMMENTS:
The above mentioned earnings report of the world’s major food producers and second biggest miners, proves the fact that the world is approaching a (food) commodity based (hyper) inflation cycle.

The announced hike of their respective dividends combined with massive share-buy back programs gives un indication, that the management of those companies believe that the current price of their stocks is too low.

Based on their fundamentals and financial conditions we have a BUY rating on the stocks of all the above mentioned companies and are expecting “Archer Daniels Midland” to announce a stock split in the coming 6- 12 months.

Last but not least, before following any investing advice, always consider your investment horizon and risk tolerance and financial situation and be aware that stock prices don’t move in a straight line and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Eric Panneflek