On Aug 9, we issued an updated research report on The Andersons, Inc. (ANDE - Free Report) . The company stands to benefit from cost savings and productivity initiatives, sale of its retail stores, underperforming assets and momentum in the Grain group. However, oversupply issues in the Plant Nutrient and Rail Groups along with negative impact of lower DDG margins on Ethanol Group’s performance remain headwinds.
Andersons reported an increase in earnings despite a drop in revenues in second-quarter 2017. The company expects net income in 2017 to be better than 2016 levels. The Grain group delivered a third consecutive significant year-over-year quarterly improvement in the second quarter. The momentum will continue in the balance of the year. Andersons anticipates continuing to earn good space income through the 2017 harvest. Additionally, it expects to have ample merchandising opportunities as harvest approaches.
The Ethanol group is anticipated to have a better second half. Declining stocks, moderating corn prices, record exports, strong gasoline demand and a favorable 2018-proposed RVO are all positive signs for the business going forward. However, Ethanol Group continues to be affected by lower DDG margins due to problems with vomitoxin in the vicinities of the group's three eastern facilities, though at a lower rate than in the first quarter. Lower international demand for DDGs also continued to pressure pricing and margins.
The railcar market is showing signs of recovery. The utilization rate rose sequentially. Andersons purchased more than 700 cars with leases attached to them in the second quarter, marking the largest quarter in terms of number of cars purchased in two years. So far in 2017, Andersons has bought 1,400 cars. It is also scrapping old underutilized cars. This has helped augment the size and increased the average remaining life of the fleet. However, the Rail Group continues to be impacted by an oversupplied market, so far this year. Further, recovery of its utilization rates may be a little later and somewhat more gradual than earlier in the year.
Andersons’ Plant Nutrient group continues to be impacted by an unfavorable combination of oversupply, low prices and margins. Further, conservative purchasing decisions of a lower customer base are also affecting revenues. The fertilizer industry needs to strike a demand and supply balance to stabilize prices, which will ultimately lead to more normal buying patterns.
The company also completed the process of closing its remaining four retail stores in the Jun 2017. It is disposing the group's real estate assets. Andersons has already sold one of the four properties and expects to close on another shortly. The divestment of these retail properties will close by early 2018. These, along with similar previous actions, will allow the company to focus on better performing assets and prospects.
Andersons has underperformed the industry in the past one year. The stock has lost around 9.3%, while the industry recorded growth of 14.6%. The company’s stretched valuation is also a concern. In case of Andersons, the trailing 12-month price earnings (P/E) ratio is 31.65, while the industry's average trailing 12-month P/E ratio is lower at 23.52. This implies that the stock is overvalued.
Andersons carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include The Chemours Company (CC - Free Report) , Golden Star Resources Ltd. (GSS - Free Report) and Kraton Corporation (KRA - Free Report) . All these stocks carry a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Chemours Company has delivered an average positive earnings surprise of 12.07% in the past four quarters. Golden Star Resources has delivered an average positive earnings surprise of 75.00% in the past four quarters and Kraton Corporation (KRA - Free Report) has an average positive earnings surprise of 16.54%.
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