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The Andersons Misses Expectations

ANDE ADM

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The Andersons Inc.'s (ANDE - Analyst Report) second-quarter 2012 earnings were $1.56 per share, missing the Zacks Consensus Estimate of $1.64 as well as the year-ago quarter earnings of $2.42.

Total revenues decreased 1.7% to $1.32 billion during the quarter, missing the Zacks Consensus Estimate of $1.37.

Cost and Margin

Cost of sales and merchandising revenues decreased 0.2% year over year to $1.21 billion. Gross profit decreased 16.4% to $102.7 million. Consequently, gross margin declined 140 basis-points (bps) to 7.8%.

Operating, administrative and general expenses increased 2.6% to $59.2 million. Operating income decreased 33.2% to $43.4 million. Operating margin dropped 160 bps to 3.3%.

Segment Performance

The Grain Group: Total revenues decreased 9.8% in the quarter to $718.9 million. Operating income also dropped 58.2% to $15.3 million. The decline was due to a more normal space income in the reported quarter compared with high wheat space income in the year-ago quarter. 

The Ethanol Group: Total revenues increased 1.9% to $167.8 million. Operating loss was $2.1 million compared to operating income of $8.8 million in the year-ago quarter, as a result of lower earnings from ethanol investment affiliates due to a rise in corn cost and reduced demand for ethanol.

The Plant Nutrient Group: The group reported total revenues of $308.8 million, up 18.8% from the year-ago quarter. Operating income increased 16.1% to $28 million, driven by volumes.

The Rail Group: Total revenues increased 8.6% to $32 million in the quarter. Operating income increased at a whopping rate of 160.6% to $7.2 million. The growth was due to higher sales of railcars and lease rates as well as non-recourse transactions.

The Turf & Specialty Group: Total revenues rose 5.5% to $43.8 million. Operating income increased 54.8% to $2.8 million in the quarter.

The Retail Group: Revenues in the segment decreased 2.2% to $44.5 million. Operating income declined 23.9% to $1.4 million.

Financial Performance

Cash and cash equivalents were $23.9 million as of June 30, 2012, compared with $20.4 million as of December 31, 2011. Long-term debt, excluding current portion, amounted to $317.6 million as of June 30, 2012, compared with $239 million as of December 31, 2011.

Outlook

The company expects that the current draught conditions will affect both the Grain and Ethanol businesses for the remainder of the year. However, it anticipates that the current Ethanol environment will benefit the Ethanol segment moving forward.

Our View

The Andersons recently completed Iowa Ethanol Plant which consists of ethanol production facility with an adjacent 2.7 million grain terminal. The new facility will render greater efficiency to the grain market and other related services of grain producers based in Iowa, adding benefits to the Ethanol Group.

However, it is expected that the second half of 2012 will remain somewhat difficult for The Andersons. It is apprehended that wheat production will slide in the second half of 2012 as compared to the second half of 2011.

Therefore, lower wheat storage is likely to be headwinds for Grain margins. Moreover, Andersons faces tough competition from companies like Archer Daniels Midland Company (ADM - Analyst Report), CHS Inc. and privately-held Cargill, Inc.

Andersons retains a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on the stock.

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