Andersons’ Q2 Earnings Beat on Record Ethanol Performance

The Andersons Inc. (ANDE) reported a 49% increase in its second-quarter 2014 earnings to $1.56 per share, beating the Zacks Consensus Estimate of $1.15 by a wide margin of 36%. Record operating performance in the Ethanol Group and improved performance in the Grain Group and Plant Nutrient Groups led to the growth in earnings, despite a decline in overall revenues.

Operational Update

Revenues in the reported quarter plunged 16% year over year to $1.31 billion. Results were way short of the Zacks Consensus Estimate of $1.38 billion.

Cost of sales fell 19% to $1.19 billion from $1.46 billion in the year-ago quarter. Gross profit increased 18% year over year to $121 million. Consequently, gross margin expanded 270 basis points (bps) to 9.3% in the quarter.

Operating, administrative and general expenses went up 24% year over year to $76 million. Operating profit went up 8% to $45 million. Thus, operating margin expanded 70 bps to 3.4% in the quarter.

Segment Performance

The Grain Group: Revenues decreased 26% year over year to $656 million due to lower grain prices, which decreased almost 30%. Operating income however increased almost five-fold to $10.3 million from $2 million in the year-ago quarter benefitting from improved space income and the addition of income from the Thompsons Limited joint venture.

The Ethanol Group: Revenues increased 2% year over year to $226 million. The segment reported record operating income of $33.9 million, a substantial improvement from $10.6 million earned in the year-ago quarter. The segment realized strong margin in all of its plants helped by increase in export demand, lower corn prices and excellent operating metrics. The segment also witnessed record E-85 sales and an increase in distillers dried grains and corn oil sales.

The Plant Nutrient Group: The segment reported revenues of $312 million, down 6%. The segment reported an operating profit of $25 million, up 8% from $23 million in the year-ago quarter.

The Rail Group: Revenues declined 13% year over year to $33 million. Operating income decreased 31% to $6.7 million from $9.8 million in the year-ago quarter.

The Turf & Specialty Group: The segment posted revenues of $42.9 million, a 1% year-over-year decline. It reported an operating profit of $2 million, a 9% drop from the year-ago quarter profit of $2.2 million.

The Retail Group: Revenues in the segment remained flat at $41 million compared with the year-ago quarter. Operating income in the quarter was $1.6 million, up 6% from $1.5 million in the prior-year quarter.

Financial Performance

Andersons ended the second quarter with cash and cash equivalents of $47 million, down substantially from $309 million as of 2013 end. The long-term debt of the company decreased to $300 million as of Jun 30, 2014 from $375 million as of Dec 31, 2013. Debt-to-capitalization ratio was at 35% as of Jun 30, 2014 compared with 37% as of Dec 31, 2013.

Our Take

Andersons will continue to benefit from acquisitions in the past year. The acquisition of Blenheim, Ontario-based Thompsons Ltd., a grain and food-grade bean handler and Mile Rail, LLC, a provider of agronomy input as well as railcar repair and cleaning equipment, will be accretive to earnings for full-year 2014.

The Ethanol group has performed well in 2013 and in the first half of 2014. The momentum is expected to continue in the balance of 2014. Even though the Plant Nutrient Group was impacted by adverse weather in the first quarter, volume was up approximately 6% during the first half of the year, regaining all of the first quarter volume reduction. It is expected to benefit from an anticipated significant corn crop planting in the second quarter. As of second-quarter end, the Rail Group's utilization rate was 89.1%, up from 86.1% in the prior year and is expected to increase in the back half of the year.

Maumee, OH-based Andersons is a diversified company operating in six different business segments ranging from buying, selling and storing grain to leasing railcars and running retail stores catering to the latest home hardware needs.

Peer Performance

Among Andersons’ peers, Bunge Limited (BG) reported second-quarter adjusted earnings of $1.76 per share, up 138% from 74 cents in the year-ago quarter. Results outperformed the Zacks Consensus Estimate of $1.41.

Andersons currently carries a short-term Zacks Rank #1 (Strong Buy). Other stocks worth considering in the sector include Gruma S.A.B. de CV (GMK) and Limoneira Company (LMNR). While Gruma S.A.B. de CV sports the same rank as Andersons, Limoneira carries a Zacks Rank #2 (Buy).