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Andersons Is Now a Bargain

May 16, 2014 | About:
Chris Mydlo

Chris Mydlo

38 followers

The Andersons Inc. (ANDE) is down over 20 percent since its most recent earnings announcement on May 7. Diluted earnings per share increased 78 percent over the first quarter of 2013, but revenue was down 21 percent. The stock has dropped too far for a company with a 5-star rating for business predictability, and it’s time to take a closer look at it.

A 5-star rating is the top of the scale for business predictability based on a proprietary formula developed by GuruFocus. Back testing 5-star companies for the past 10 years results in a 12.1 percent annual gain for their stocks. Only 3 percent of the stocks experienced a loss if held for 10 years. You can follow the Top 25 Undervalued Predictable Companies portfolio at GuruFocus. It has outperformed the S&P 500 by 29.71 percent since inception in 2009.

Andersons is a diversified company rooted in agriculture. It was founded in 1947 and conducts business across North American in the grain, ethanol, plant nutrient sectors, railcar leasing, turf and cob products, and consumer retailing. A majority of the revenue comes from the grain segment. In the first quarter of 2014 the ethanol and railcar segments represented nearly 80 percent of its earnings. The two segments also provide the highest margins of 18.8 percent for the ethanol segment and 28.8 percent for the railcar segment. The operating margin for the overall company is 1.55 percent.

Q1 2014

Segment

Revenue (Millions)

Percent of Total Revenue

Earnings (Millions)

Percent of Total Earnings

Ethanol

189

18.8%

19.8

45.2%

Rail

52

5.2%

15

34.2%

Grain

583

58.1%

11.3

25.8%

Plant Nutrient

108

10.8%

-1.4

-3.2%

Turf & Specialty

44

4.4%

1.4

3.2%

Retail

28

2.8%

-2.3

-5.3%

Total

1004

 

43.8

 

The grain group is the main segment of the company. $17.1 million of the income from the group was from a partial sale of its Lansing Trade Group holdings. It reduced its stake from 47.5 percent to 39.2 percent. Without the gains from the sale, the grain group had operating loss of $6.4 million. According to their Q1 conference call, the company expects to have positive operating earnings in the group in the second quarter. The decrease in grain profits have been industry wide. Archer Daniel Midland (ADM) stated that merchandising and handling declined as margins were limit both by inverted corn, soybean and wheat markets and by increased costs that were exacerbated by weather. Bunge Ltd (BG) had mentioned deteriorating U.S. winter wheat conditions were contributing to the pressuring of margins. S&P Capital IQ gives a neutral outlook for the agricultural products sub-industry over the next 12 months. For the long-term they anticipate that overall agribusiness-related production and revenue will increase, helped by world population growth, heightened global demand for proteins and grain-based crops, and continued industry consolidation and globalization of operations.

While the grain group struggled, the ethanol and railcar groups have helped stabilize Andersons’ earnings. According to the quarterly conference call, the two divisions are expected to remain strong throughout the year. Andersons can work to improve their margins by expanding the railcar segment. The company has been looking to purchase new railcars on a car by car basis to add to their fleet. Andersons recently completed the purchase of Mile Rail, LLC, a railcar repair and cleaning provider in September of 2013.

Andersons is financially stable and has been working on reducing their leverage. The company scores a 7/10 for financial strength and an Altman Z-Score of 3.66 indicating safe levels of debt. Seasonally Andersons will have higher debt-to-equity levels in March. It is currently at 0.87, lower than Bunge’s D/E ratio of 0.94, but higher than Archer Daniels Midland’s D/E ratio of 0.28. Over the past six years the company has been working on improving its balance sheet and reducing its leverage.

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After dropping nearly 30 percent from its 52-week high $65.28, the stock is now trading at a bargain price of $46.65. Just because I think the stock is a bargain now, the price is likely to go even lower with its downward momentum. Using a common Wall Street cliché, buying now is like trying to catch a falling knife. To soften the damage, one could buy in increments and average down over time or wait for the price to stabilize first.

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I think the stock is a buy due to its business predictability and its recent drop in pricing bringing it P/E ratio below is historic median. Its 10-year median P/E is 16.7, and its P/E ratio is now at 13.23. That is 21 percent discount and prices the stock at $59.29 according to its median P/E. Since the company has been highly predictable over the past 10-years, the GuruFocus DCF Calculator can be used to generate a fair value. The company has been consistently growing its earnings over the past 10-years at an annual rate of 14.6 percent. Its EBITDA has been growing at an annual rate of 11.90 percent over the past 10 years. Even if we are in a down year for corn and wheat crops, in the long-term Anderson’s is likely to continue growing. If there is a down year in crops, the demand for the ethanol and railcar segments will help the company stabilize its earnings. Using the average growth rates of earnings and EBITA combined with a discount rate of 12 percent, the fair value of Andersons is $58. That amounts to a margin of safety of about 18 percent.

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