Andersons Stays Neutral

We reiterate our Neutral recommendation on The Andersons, Inc. (ANDE - Analyst Report) as it remains cautious about the second-quarter 2012 results and fears that wheat space income in the Grain Group would decline in the quarter. Further, it expects lower margins in the Ethanol Group as well as the Plant Nutrient Group.

The company’sfirst-quarter 2012 earnings were 98 cents per share, exceeding the Zacks Consensus Estimate of 90 cents as well as the year-ago quarter earnings of 93 cents. Total revenues increased 13.5% year-over-year to $1.137 billion, surpassing the Zacks Consensus Estimate of $1.107 billion.

Based in Maumee, Ohio, Andersons is a diversified company operating in five different business segments ranging from buying, selling and storing grain to leasing railcars and running retail stores, catering to the latest home hardware needs. It competes with the companies like Archer Daniels Midland Company (ADM - Analyst Report), CHS Inc. (CHSCP) and privately-held Cargill, Inc.

Andersons completed the purchase of Iowa Ethanol Plant in May 2012. The new plant consists of an ethanol production facility with an adjacent 2.7 million grain terminal with direct access to two Class 1 railroads in Iowa. It will carry out its operations in the west of Mississippi which is included in the Andersons Denison Ethanol LLC. This is Andersons’ first ethanol plant in Mississippi.

Through this acquisition, Andersons will extend its geographical boundaries, diversify and augment the customer base in its Ethanol Group. It is expected that the new facility will render greater efficiency to the grain market and other related services of grain producers based in Iowa. Andersons generates the majority of its revenues from the Grain and Ethanol Group. Therefore, the company undertakes constant efforts to upgrade the business and strengthen its market position in the face of growing competition.

Andersons increased its quarterly cash dividend by 36.4% to 15 cents in first-quarter 2012 adding value to its shareholders. The company has increased its dividends regularly each year since 2009.

However, the economy is still weak and its negative impact on the Retail group remains a concern. During the first quarter, the segment had an operating loss of $2.7 million. Stiff competition, especially from the mass merchandisers and do-it-yourself home centers, has also added to the company’s concerns. Consequently, Andersons has not achieved much improvement in this segment.

Moreover, it is feared that the company will generate lower margins in the Ethanol and Plant Nutrient Group. Overcapacity in the industry along with weak gasoline demand and lower ethanol exports will pressure the near-term margins of the Ethanol Group. In the Plant Nutrient Group, the company has been benefiting from price increase, recurrence of which is unexpected moving ahead.

Our recommendation on Andersons is in line with the short-term Zacks #3 Rank (Hold).