On Feb 6, we downgraded our recommendation on The Andersons Inc. (ANDE) from Outperform to Neutral. It is a diversified company with operations ranging from buying, selling and storing grain to leasing railcars and running retail stores catering to the latest home hardware needs.
Concerns regarding the outlook of the domestic ethanol, significant decline in fertilizer volumes and higher expenses in the car business offset benefits from its proficiently managed railcar portfolio, record corn crop and acquisitions led to the downgrade.
Why Downgraded?
Andersons reported third-quarter 2013 earnings of 91 cents per share, up 1% year over year. Revenues in the reported quarter rose 4% year over year to $1.18 billion.
Andersons’ Rail Group continues to benefit from increased financing opportunities, higher railcar lease rates, larger railcar fleet and expansion of the railcar repair business. The acquisition of railcar repair and cleaning provider, Mile Rail is expected to increase Andersons’ railcar repair revenues by 25%.
The outlook for the Grain segment remains strong on the back of a record corn crop along with improving global demand. Due to drastically reduced 2012 harvest brought about by drought conditions, global inventory levels across major crop commodities are low. The record crop will drive a rebound in grain storage and handling volumes and Andersons will benefit from the wave of restocking.
Andersons’ strategy is to grow its grain business that entails geographic expansion, expansion of existing facilities, acquisitions and grain-handling agreements. In July, Andersons completed the acquisition of Ontario-based Thompsons Limited, a grain and food-grade bean handler and agronomy input provider.
Andersons added 12 elevators, 11 retail farm centers, 2 seed processing plants, five bean processing plants and a wheat processing plant. Thompsons had a total grain storage capacity (owned and leased) of 20 million bushels and 30,000 tons of nutrient capacity. The deal is expected to be accretive to full-year 2014 earnings.
On the flipside, The Turf & Specialty group’s performance will be negatively impacted by the car business, which will incur higher expenses than usual, as it continues to invest in operational and safety improvements at the Mt. Pulaski facility acquired last year.
The Plant Nutrient Group segment reported an operating loss in the quarter due to a significant decline in fertilizer volumes. Volume for the period was lower than anticipated due to later harvest this year compared with the prior year, which proved to be unfavorable for early third-quarter nutrient application.
Even though margins improved in the ethanol business, the company cautions that the ethanol market will continue to be volatile. According to reports, the U.S. Environmental Protection Agency (EPA) is considering a reduction in the amount of ethanol required to be blended with gasoline in 2014. If the proposed reduction is adopted, it would affect ethanol producers like Andersons.
Other Stocks to Consider
Andersons currently retains a short-term Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Gruma S.A.B. de CV (GMK), Amira Nature Foods Ltd. (ANFI) and Calavo Growers Inc. (CVGW). While Gruma S.A.B. de CV holds a Zacks Rank #1 (Strong Buy), Amira Nature Foods and Calavo Growers hold a Zacks Rank #2 (Buy).
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