ANDE - The Andersons: Operational Excellence And Supply Chain Centricity Drive Value Proposition

2023-05-21 04:10:04 ET

Summary

• In the past year, Andersons (+2.89%) has experienced price growth poorer than the general market (+6.98%) but superior to the agricultural industry (-7.59%).
• This reflects the company's record 2022 revenues and positive free cash flow as well as anxieties regarding ag commodities and depressed demand.
• However, Andersons lends itself as a pure play for rising agricultural demand while being less sensitive than producers on commodity prices and demand volatility.
• The company has positioned itself to capture growth across all verticals, dealing in the trade of ag commodities, ag-based renewables, and nutrients and industrial facilities.
• As such, alongside a steep undervaluation, Andersons operational excellence leads me to rate the company a 'strong buy'

The Andersons (ANDE) is a diversified agriculture company with a significant focus on the ag supply chain and businesses across ag trade, renewables, and plant nutrient products. End markets for the firm include food, feed, and fuel.

The company positions itself along critical points of the North American ag supply chain, including nutrient warehousing, farm centers, trade elevators, and ethanol plants.

Introduction

Andersons' dual strategic growth objectives hinge upon its ability to sustain leadership in its central businesses while exploring growth opportunities in grain and fertilizer verticals, with bolt-on acquisitions to bolster market position and leverage core competencies and enable innovation across trending areas.

For instance, through its pre-existing renewables business, Andersons aims to penetrate the novel carbon sequestration market. On the other hand, for margin and scale expansion in its eminent industries, Andersons is looking towards operational efficiency, macro growth in ag demand, and a disciplined capital deployment strategy.

Valuation & Financials

General Overview

Over the TTM period, Andersons - up 2.89% - has seen middling growth between the market, represented by the S&P 500 ( SPY ) - up 6.98% - and the agricultural industry ( DBA ) - down 7.59%.

The stock trailing the general market manifests the firm's sensitivities to commodity price swings in addition to reductions in demand for non-ag-centric activities (i.e., renewables).

Conversely, superior performance to the agricultural industry demonstrates the company's operational resilience and ability to navigate macro headwinds.

Key Q1 Financials

Over the past quarter, Andersons has seen a decline in sales and merchandising revenues due to demand compression, the firm's lean capabilities enabled gross profit growth and stable adjusted EBITDA from continuing operations.

Comparable Companies

The inherent nature of the ag supply chain industry lends itself to consolidation- meaning many of Andersons' competitors are much larger and private- or extreme fragmentation, with smaller, single-part orientation in the supply chain. As such, Andersons is best compared to similar-sized companies operating in different parts of agribusiness. For instance, Cal-Maine (CALM) is a producer and distributor of fresh egg products, while the likes of Archer-Daniels-Midland (ADM) and Bunge (BG) occupy a similar space to Andersons but are much larger.

As demonstrated above, Andersons has seen similar 1Y and quarterly growth to peer companies, who are either similarly sized to Andersons or operate in a similar manner.

However, I maintain that Andersons faces a steep undervaluation with its 5-year return not adequately reflecting 369.99% revenue and 252.17% earnings growth over the same period.

Moreover, Andersons' relatively low profitability demonstrates an outsized ability for the firm to execute on margin expansion as peer firms have historically. Alongside the lowest P/CF and P/BV ratios, Andersons presents a tremendous value proposition.

Valuation

According to my discounted cash flow analysis, at its base case, Andersons is undervalued by 33%, with its fair value being $58.17, up from $38.70 today.

With a low debt/equity but a slightly higher equity risk premium (due to a higher long-term beta), I assumed a benchmark 8% discount rate, in line with general industry hurdle rates. Additionally, although Andersons has enjoyed significantly greater multi-year CAGR, I assume a conservative growth rate of 2% - the eventual rate of inflation - thus accounting for macro volatility and recessionary pressures.

AlphaSpread's multiples-based relative valuation tool more than corroborates my thesis of undervaluation, calculating a base case undervaluation of 57%, with the calculated true value of Andersons' stock being $91.27.

While AlphaSpread is not influenced by high debt levels or the like, many of the companies it compares Andersons to are significantly larger, with that scale reducing the access to the same level of growth Andersons can sustain.

Therefore, using a weighted average skewed towards my DCF, the fair value of Andersons is $64.31, with the stock currently undervalued by 38%.

Inelasticity & Entrenched Presence Underpin Resilience; Tailwinds Propel Growth

Though dual recessionary and inflationary forces may reduce demand or increase costs, the inelastic nature of Andersons' services will not necessarily lead to large margin or scale reductions. For example, in 2022, the firm still managed to trade upwards of 34mn tonnes of grain, 2.1mn tonnes of feed ingredients, and so on. The firm's trade activities, the core of the business, can thus be summarized as value-added risk management services for producers, merchandising, and logistics for ag commodities.

Additionally, Andersons is well-positioned to leverage the disconnect between global ag production and demand, entrenched in the US supply chain and thus reaping the benefits of all trading activity.

Strategically, beyond relying on macro growth factors, the company has expanded its footprint into ethanol and vegetable oils production and merchandising, becoming the 5th largest US ethanol producer in a $93.78bn US market. Moreover, a partnership with Marathon Petroleum, the nation's largest ethanol blender, only accelerates the company's foray into the renewable fuels industry.

And to adequately support continued growth and stability in these arenas, Andersons has committed to a disciplined capital spending plan, focused on capital investment intensity, a continually strong balance sheet, and maintenance of long-term debt-to-EBITDA of <2.5x.

Wall Street Consensus

Analysts largely echo my highly positive view of the stock, estimating an average 1Y price increase of 36.72% to $52.50.

Even at the minimum 1Y price projection, analysts predict an increase of 30.21%, to a price of $50.00.

This demonstrates the highly bullish consensus on ag prices, Andersons' ability to navigate this macro environment, and the firms' segmented and geographic strength.

Risks & Challenges

Excess Regulatory Complexity

Agriculture and Andersons' subsequent operating activities are dominated by highly regulated industries. Any level of change or increase in compliance can materially increase overall costs and ability to operate. And an inability to follow compliance will result in liability and legal issues. This extends to environmental in addition to agricultural liabilities.

Inventory Management Requirement

As a logistics and storage agricultural hub, Andersons is required to hold significant amounts of inventory across all its businesses. Damage or obsolescence of any inventory can reduce asset value and harm balance sheet results.

Commodity Price Volatility

Although Anderson is insulated from the worst of commodity price volatility, they nonetheless face supply and demand pressures from commodities. Increases in input commodity costs, such as natural gas, or reductions in ethanol prices would materially harm cash flows.

Conclusion

In the short term, I expect Andersons to revert to its fair price and leverage a potential economic recovery theme.

In the long term, I project that Andersons will be well-positioned to take advantage of the ag supply gap and increased ethanol demands.

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