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Andersons (ANDE) Incurs Loss in Q1, Sales Lag; Shares Fall

Shares of The Andersons Inc. ANDE have fallen 7% since reporting a first-quarter 2016 adjusted loss of 52 cents per share on May 4. The performance was in stark contrast to the Zacks Consensus Estimate of earnings of 4 cents as well as the year-ago quarter’s earnings of 14 cents per share.

Market conditions in the first quarter prevented Grain Group from realizing meaningful basis appreciation following last year's poor harvest in the Eastern Corn Belt.  Additionally, Andersons’ affiliates experienced losses resulting from limited trading opportunities, including compressed margins at both the producer and processor ends of the supply chain, and significant reductions in distillers dried grain shipments to China.

Operational Update

Revenues in the reported quarter declined 3.3% year over year to $887.9 million and also fell short of the Zacks Consensus Estimate of $889 million.

Cost of sales fell 1.8% to $820 million from $834.9 million in the year-ago quarter. Gross profit declined 18.7% year over year to $67.8 million. Consequently, gross margin contracted 150 basis points to 7.6% in the quarter.

Operating, administrative and general expenses went up 1.6% year over year to $79.9 million. Andersons posted a loss of $12 million in the quarter, as against earnings of $4.7 million in the year-ago quarter.

Segment Performance

The Grain Group: Revenues decreased to $538.8 million from $558.7 million in the year-ago quarter. The segment reported a loss of $17.4 million as against earnings of $0.7 million in the year-ago quarter. Through the first quarter, the market provided little carry or basis appreciation as global supplies and a strong dollar weighed on inventory movement. This resulted in loss in the segment. The Group's affiliates were also impacted by the weak basis and spreads which limited space income.

The Ethanol Group: Revenues fell 13.6% year over year to $114.7 million. The segment reported a loss of $2.7 million as against earnings of $5.3 million in the year-ago quarter.

The Plant Nutrient Group: The segment reported revenues of $467 million, up 8.5% year over year. Operating income of $1.7 million was an improvement from $0.4 million in the prior-year quarter, driven by stronger sales of nutrient and lawn products.

The Rail Group: Revenues decreased 10.4% year over year to $36 million. Operating income declined to $9.4 million from $10.3 million in the year-ago quarter.

Financial Performance

Andersons ended the quarter with cash and cash equivalents of $46.3 million compared with $63.8 million at the end of 2015. Long-term debt was $402.4 million as of Mar 31, 2016, compared with $436.2 million as of Dec 31, 2015.

Other Updates

During the reported quarter, the company signed an agreement to sell eight grain and agronomy assets in western Iowa to MaxYield Cooperative. Andersons acquired the grain and agronomy locations as part of a larger transaction with Green Plains Grain Company in 2012. The Tennessee assets acquired during that same transaction will remain part of Andersons. The transaction does not involve the Denison ethanol facility or the recently-acquired Nutra-Flo facilities in Iowa. This transaction closed on May 1, 2016.  The sale will result in a small gain in the second quarter of 2016.

In early March, Andersons redeemed its stake in Iowa Northern Railway after nearly six years of investment in the short line. Meanwhile, the company will continue to have an ongoing relationship with the railway, providing repair services.

Outlook

Andersons’ outlook for the remainder of the year remains strong as nutrient sales are trending favorably and ethanol margins are expected to improve with summer driving demand.

However, the grain group’s performance will continue to be challenged until the fall harvest, which should produce opportunities to return to normal levels of profitability. Negative industry fundamentals persist for commercial grain handlers, including high global inventory levels and moderate movement. These will limit opportunities for improvement for the group in the near term.

Again, many factors point to opportunities in the fourth quarter and going into 2017. The combination of the high levels of residual inventory in the industry and the recently published planting acreage estimates points to higher space utilization levels during this year's harvest, providing opportunities for the company to purchase grain at more normal discounts and achieve desired profits from the space.

The outlook for the ethanol group entering the stronger spring and summer driving months is positive though mixed. U.S. national average gasoline prices are running below five-year lows, supported by high stocks of crude and low oil prices. Demand from higher gasoline consumption should provide some relief to margin pressures from current gasoline prices.

Further, the conditions for the plant nutrient group early in the second quarter have been good across the farm belt, with April showing continued strength in basic and specialty nutrients. Assuming that favorable weather conditions will prevail, the second quarter should yield good results for the group.

The year 2016 is off to a good start for the rail group. While market conditions will raise challenges to asset utilization and renewal rates, the group is well positioned for the slowing rail shipping cycle with currently high utilization rates, even spread of lease renewal activity and a diverse lease customer base.

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.

Zacks Rank

Andersons currently carries a Zacks Rank #5 (Strong Sell).

Some better-ranked stocks in the sector include PH Glatfelter Co. GLT, Trinseo SA TSE and Sinopec Shanghai Petrochemical Co. Ltd. SHI. All three stocks sport a Zacks Rank #1 (Strong Buy).

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