Today’s earnings report from Archer Daniels Midland (NYSE:ADM) not only missed analyst’s targets, but may have missed the broad side of the barn.

Analyst expected EPS of $0.67, and got EPS of $0.58. Revenues jumped substantially to $21.78 billion for the quarter, way above estimates of $16.03 billion.  But the earnings may just be the start of the problems.

For ADM’s full 2008 fiscal year, profit fell by 17% over last year to$1.8 billion (EPS of $2.79) from $2.2 billion (EPS of $3.30). The stockhas already breathed on a new 52-week low in early trading.

Net earnings were off $583 million from the same period a year ago, and$360 million for the full fiscal year. ADM attributed the drop tohigher income taxes of $967 million, and a portion of $1.04 billiongain from an asset sale. The big hit to earnings was an $855 milliondrop in the corporate division’s earnings before income taxes. ADMstated that the drop was "related to LIFO [last in, first out]inventory valuations which increased from $60 million to $198 millionfor the quarter and from $207 million to $569 million for the year."

This issue won’t go away this quarter. The softness in the crude oilmarket due to US drivers staying off the roads will also affect cornethanol inventories. ADM reported that corn prices and operating costsare higher, leading to more costly inventories. This is essentiallyidentical to the inventory problems facing crude oil refiners likeValero (NYSE:VLO) and Tesoro (NYSE:TSO). Refining profits, whether ofcrude or corn, depend on precise inventory management.

ADM will have to figure this out quickly.  Shares had already comesharply off highs.  The 5% drop to under $26.00 so far today has almostcut the stock in half from the April highs, and you can go ahead andchalk this up as a 52-week low.

Paul Ausick
August 5, 2008

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