By Tim Todd

BridgeNews Commentary.

KANSAS CITY (B)--To paraphrase perhaps the best advice Forrest Gump got from his mother: Earnings reports from Archer Daniels Midland are like a box of chocolates--investors certainly have no idea what they're going to get.

In January, the commodities processor topped Wall Street's expectations for the first time in a year.

But April 23, with analysts looking for a more than 40% gain in earnings per share, ADM reported quarterly results that not only fell short of that lofty target, but were actually down 6% from a year ago.

Needless to say, ADM and earnings estimates don't go together like peas and carrots.

But what made matters worse was that ADM, a company that's historically shown little Wall Street savvy, had some problems explaining what went wrong in its March-ending quarter.

Further compounding the issue were implications, at least in the minds of some analysts, that ADM was comfortable with full-year earnings expectations in the weeks before releasing the third-quarter report. That belief led to at least some degree of comfort with the third-quarter outlook.

Communicating with Wall Street has never been ADM's strong suit. The company didn't attach a statement to its quarterly results until last July. Prior to that, company watchers could count on only a brief paragraph or two, usually around 200 words, with only bare bones profit information. Revenue totals, for instance, were held back and made public separately, often as late as two weeks after the fact.

Communicating with Wall Street has never been ADM's strong suit. The company didn't attach a statement to its quarterly results until last July. Prior to that, company watchers could count on only a brief paragraph or two, usually around 200 words, with only bare bones profit information. Revenue totals, for instance, were held back and made public separately, often as late as two weeks after the fact.

Even during the recent conference call an analyst asked a balance sheet question and company officials said they didn't have one available to reference.

April 23, ADM reported fiscal third-quarter profits of $93.1 million, or 15 cents per share, down from $103.0 million, or 16 cents per share, a year ago. The performance was less than two-thirds the 23 cents per share analysts were expecting, according to the First Call/Thomson Financial survey.

In the earnings release, ADM blamed $39 million worth of higher energy costs and said that "in addition" a negative swing in equity fund investments, from a $51 million profit to a $4.5 million loss, weighed on earnings.

Virtually all wire service reports of the earnings release, issued immediately after the results became public, focused on energy costs pummeling ADM's performance.

Similarly, the first analyst question during the ADM conference call was about energy and how analysts, hoping to get their estimates in line with ADM's performance, could divine the impact of a jump in natural gas prices on the company's bottom line.

The response: ADM's energy expense, while up $39 million year-over-year during the quarter, was "relatively consistent" with what the company saw in the two previous quarters.

In fact, ADM officials said energy costs were up $36 million year-over-year during the December-ending quarter, a period when earnings jumped 22% and beat analyst expectations.

The real problem, as it turned out, was the equity investments, which declined $56 million year-over-year, or 6 cents per share.

As analyst reports issued a day later noted, the shortfall came from a non-operating item and without the decline, ADM would have missed consensus by only 1 cent per share.

What made the shortfall worse was a smattering of media reports during the quarter suggesting Allen Andreas, ADM's chief executive, was comfortable with earnings projections for the year. Or was he? The point was certainly debated during the conference call.

That's perhaps a bit too fine a distinction for Wall Street and, as Merrill Lynch analyst Leonard Teitelbaum pointed out, there was certainly some implied sense of ADM's comfort within the investment community regardless of how it was created.

Since ADM knew what analysts were looking for and knew what the stories said, it would seem the company should have addressed the matter prior to the earnings release. But ADM doesn't issue any kind of earnings guidance.

The company could argue that an earnings warning only changes the timing of the market's reaction. When it comes to pay now or pay later, ADM, unlike many public companies, chooses to take the hit later and forgo the warning. Fair enough; that's their choice.

But here's the problem if you're an ADM investor: Those private equity fund investments that hit the third-quarter results relate to emerging markets and, as analysts point out, they expose ADM's earnings to a fair amount of volatility. That's volatility largely outside the view of analysts who make the earnings estimates against which ADM is judged.

Among myriad commodities businesses, ADM is active in the cocoa sector, but shareholders still might be better off with an occasional earnings warning instead of a box of chocolates four times a year.

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