Eye on The Andersons Group

The Andersons, Inc. (ANDE), together with its subsidiaries, operates in the agriculture and transportation markets in the United States. It operates in five segments: Grain & Ethanol Group, Rail Group, Plant Nutrient Group, Turf & Specialty Group, and Retail Group.

The Grain & Ethanol Group segment purchases and merchandises grain; operates grain elevator facilities; provides management services for ethanol production facilities; and engages in grain and ethanol trading.

The Rail Group segment buys, sells, leases, rebuilds, and repairs various types of used railcars and rail equipment; and provides fleet management services to fleet owners, as well as operates a custom steel fabrication business. It also provides ongoing railcar maintenance and management services for the financial intermediary.

The Plant Nutrient Group segment purchases, stores, formulates, manufactures, and sells dry and liquid fertilizer to dealers and farmers; provides warehousing and services; formulates liquid anti-icers and deicers for use on roads and runways; and distributes seeds and various farm supplies.

The Turf & Specialty Group segment produces granular fertilizer products for the professional lawn care and golf course markets; and private label fertilizer, corncob-based animal bedding, and cat litter for the consumer markets. It sells consumer fertilizer and control products to mass merchandisers, small independent retailers, and other lawn fertilizer manufacturers.

The Retail Group segment offers hardware, plumbing, electrical, and building supplies; and other housewares, as well as specialty foods, wine, and indoor and outdoor garden center products through its stores. This segment operates its stores under The Andersons' name. The company was founded in 1947 and is based in Maumee, Ohio.

Financial Results

On Wednesday, June 20th, ANDE boosted its full-year profit guidance, citing a strong second-quarter performance from its agricultural businesses. The announcement sent Andersons shares up over $4.00 per share last week, although the stock has ranged from $31.05 to $48.46 over the past year.

Andersons said it expects to post a profit of $2.80 to $3.05 per share in 2007, up from last month's guidance of $2.35 to $2.60 per share. Analysts polled by Thomson Financial expect the company to post a profit of $2.62 per share for the year.

Andersons said that in the time since it issued its previous guidance, it finished its planting process, resulting in a positive impact on the earnings outlook for its grain and ethanol and plant nutrient groups. Furthermore, a new ethanol plant in Indiana has begun producing ethanol, and both of the company's ethanol plants are realizing better margins than previously expected

Balance Sheet Notes

ANDE operates with a slightly aggressive balance sheet, with cash balances on the Company’s ledgers currently standing at $27.5 million, offset with $353 million of debt at the quarter's end on March 31, 2007. Annual revenues are nearly $1.6 billion in the trailing twelve month period, and gross profits for the last 12 months have been $207 million. EBITDA has grown significantly over the past few years, to top $87 million in the trailing twelve months ending March 31, 2007. Currently there are 16 million shares outstanding in ANDE’s float, of which nearly 4 million shares are currently shorted as of May 10, 2007. This makes a significant short position in the shares that would take approximately 7.4 days of normal trading volume to cover. The short percentage of the total float is at 26.6%, meaning that a short squeeze is quite possible in these shares.

Analyst Expectations, Forward Quarters

Looking at the current expectations for the Company, ANDE is expected to achieve approximately $2.60 in earnings per share this year, putting the current P/E ratio for the Company at roughly 16x its expected calendar year forward earnings. 2008’s earnings are forecast in a range from $2.94 to $3.44 per share in profitability. We like that the Company is guiding these estimates upwards due to greater successes and higher margins. Growth is on the horizon here, and we encourage investors to be a part of it.

Investment Recommendation

We recommend that investors accumulate ANDE shares at or below $45.60 per share, with a target exit price of $50.00 per share, via a written call at the $50 strike price.

Buy the stock outright/ write covered calls at intermediate points: We would commit 50% of the capital balance investors would like to commit to this company at present levels Monday Morning, June 25th, 2007, at or below $46.50 per share, and then look to add another 50% position if the stock price declines to a level of $44.00 or lower. The two-stage buy recommendation is based upon possible activity in the stock relative to commodity prices and general market movements. On any shares purchased at or below 46.50, we would look to write September 2007 expiration covered calls at the $50.00 strike price against this long position. Currently those calls are bid at $2.05 per share. We would also put a stop loss sell order on the shares acquired at these levels recommended above, at a price of $41 (approximately 5% down from an individual’s acquisition price).

Disclosure: Analyst manages a fund and client accounts with the ANDE long stock positions and covered calls described in this report.