The Andersons: Blowout Results Confirm The Bull Case
- The Andersons just reported blowout quarterly earnings as the company saw gains across all segments.
- The company continues to benefit from a surging agriculture bull market and its ability to benefit from improvements throughout the entire supply chain.
- Given the company's valuation, I believe traders should expect strong double-digit gains going forward.
On April 18, I explained why The Andersons, Inc. (NASDAQ:ANDE) is one of my favorite agriculture plays. The company is not only well-diversified and a key component of the agriculture/food supply chain, the company is reaping the benefits from the ongoing bull market in agriculture.
The reason I am covering the company again is its 1Q21 performance. Normally I don't care about every quarterly report, however, the company reported blowout numbers as it did much, much better than anyone could have thought. The company saw growth in all segments and was able to turn this into strong free cash flow. Needless to say, I remain a huge bull and believe the stock's breakout is sustainable and still offers opportunities for investors who have been on the sidelines.
The Agriculture Bull Case
Basically, I have been bullish on agriculture for roughly one year as I anticipated a few things that are now slowly turning into reality. For example, we are seeing strong grain demand from overseas as China is rebuilding its hog herds while (apparently) still struggling with the African Swine Fever. Given that it is extremely hard to ramp up production, this has caused stocks/usage ratios to fall.
Source: Mosaic - Next Up: $50
As a result, we are now seeing that corn has made it all the way to $695, which is one of its highest levels ever and the steepest uptrend since 2011. Back then, farmers also benefited from low stock/usage ratios and very accommodative central banks (the money had to go somewhere).
On top of that, it seems that my wild card (bad weather conditions) is becoming a reality as my tweet below shows. So far, data shows that weather conditions in Mato Grosso are becoming a huge headwind for crop conditions, which could lead to a much lower harvest yield than previously assumed. Keep in mind that Mato Grosso is where Brazil plants most of its corn. Also, and I mentioned this in my earlier Mosaic (MOS) article (please read it if you want more agriculture bull market details), Brazil is currently the only country that is able to boost its production to ease the supply/demand tensions. Right now, it's not looking like that is going to happen.
At this point, this is just a part of the bull case for ANDE as this company (see graph below) benefits from a lot of supply chain operations. Higher crop prices due to high export demand are benefiting the company's trade, rail, and fertilizer operations as it increases both volumes and margins. However, the company also produces ethanol.
Source: The Andersons Investor Presentation (March 2021)
Right now, ethanol stocks are at their lowest levels since October 2020 when demand imploded due to low car and air travel numbers.
Source: CME Group
Now, we are seeing higher (expected) demand as the summer will likely see a huge boost in traffic. As ethanol production has already rebounded, it should be assumed that production will have to increase even further as inventories are depleted. I also expect that ethanol will be increasingly important as oil prices are currently breaking out.
Source: CME Group
Now, without further ado, let's look at ANDE's 1Q21 numbers, which confirm the entire bull case.
ANDE Confirmed My Bull Case
I have to admit that I had to check ANDE's numbers twice as I couldn't believe it. What we are dealing with here is a company that reported GAAP EPS of $0.45, which is $0.42 above expectations. This was caused by $2.6 billion in sales. That's $620 million higher than expected (30% above expectations!) and up 42.7% on a year-on-year basis. I have analyzed dozens of companies over the past few weeks, and this is - by far - the best result I have seen.
President and CEO Pat Bowe summarized it quite well.
We are very pleased with the start to 2021 in this demand-driven agriculture rally. These results are our best first quarter performance since 2014 and reflect good execution coupled with the results of our multi-year cost reduction project. Commodity price volatility and market dislocations have created merchandising opportunities in many of the commodity supply chains that we touch in our Trade business and we expect that this will continue in the near term.
In the table below, I marked some highlights like the fact that all segments not only improved but reported blowout pretax income. For example, ethanol went from a $24 million loss to a gain of $2.9 million as ethanol prices reached a six-year high combined with strong margins. Also, plant nutrients had its best quarter since 2008 on increasing volumes and strong margins - both of these things are expected to continue to improve.
Source: ANDE 1Q21 Earnings Release
As a result, EBITDA rose 8x to $80 million. I had expected that this number would be close to $60 million.
The company also lowered total net capital expenditures from $30 million in the prior-year quarter to $15.7 million. Note that these numbers include both CapEx purchases and sales of assets. ANDE also repaid $126 million in long-term debt and issued $90 million new long-term debt, effectively lowering net debt by $36 million.
ANDE Offers Good Value
Based on the company's own expectations - using March data - I believe the company will easily beat its old expectations and be able to generate more than $400 million in EBITDA in 2023. I even think that they could do $300 million in EBITDA this year as I believe that the agriculture bull market is still flying under the radar. However, I won't use that in my valuation as I want to show you that ANDE is even cheap when using somewhat conservative expectations.
Source: The Andersons Investor Presentation (March 2021)
Right now, the company is trading at $1.08 billion (including a 5-6% post-earnings price increase). The company is expected to keep net debt close to $1.3 billion. I believe this could be significantly lower, but I'm using this estimate as I believe that the company will use higher-than-expected free cash flow to boost investments. As a result, I'm using an enterprise value of $2.4 billion.
Based on $400 million in expected EBITDA, this gives us a multiple of 6x. That's the same number I used in my prior article. The only difference is that a higher stock price has been offset by higher EBITDA estimates. In other words, I'm sticking with my extremely bullish call that ANDE has the potential to hit $70 based on its valuation range and growth potential.
Since February, the valuation has come up a bit, however, I still believe the stock can move to $70. Yes, that implies a capital return of more than 100%, but I think this is achievable over the next 1.5-2 years. It could be within 1.5 years if we indeed see a commodity super-cycle. This isn't part of my bull case as I consider it to be a wild card, but a situation where commodities start to explode while the Fed supports the stock market will almost certainly cause buying panic in basic materials - especially the undervalued ones like agriculture.
My advice remains unchanged - but maybe more bullish than before - as I believe that ANDE is one of the best ways to benefit from improving business conditions in the agriculture sector. Over the course of the next few quarters, we will more than likely witness a steep increase in ethanol production, further rising crop prices, and the ability of companies like ANDE to raise margins.
If you are not long ANDE, I think current prices still offer an attractive entry with the possibility to make up to 100% if we indeed enter a commodity supercycle. If that is not the case, I think we are still looking at strong double-digit returns over the next 3-4 quarters.
On a side note, keep in mind that ANDE is very volatile. If you decide to place a trade, be aware of that and keep your exposure limited. I usually do not invest more than 2% of my trading account in volatile investments.
(Dis)agree? Let me know in the comments!
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