This Agricultural Stock Is Lagging Its Competitors

There's no doubt that The Andersons (Nasdaq: ANDE  ) has had a fantastic year. In the last 12 months, revenue has grown 30% and net income has grown more than 50%. Meanwhile, the company's P/E ratio has actually fallen, from an already-cheap 10.5 to an even-cheaper 7.6. Despite a cheap stock and a well-performing business, I don't believe The Andersons is a good buy. Read on to see why I'm making a bearish CAPSCall on this stock.

All you need is high prices
In the most recent quarterly earnings report, management itself warned very clearly that "it is important to remember that revenues in commodity-based businesses do not serve as good indicators of income or economic performance." Corn and other grains have been having a spectacular year, so pretty much all agribusiness companies have seen their revenues floated higher by the rising tide, and none of them should get much credit for these year-over-year comparisons.

The Andersons' revenue gains are largely responsible for its net income gains as well. Net margins have expanded, but mostly because operating and administrative expenses held relatively steady while revenues grew, a pretty easy feat when revenues are growing because of price appreciation and not increasing sales volume. That means margins will narrow again just as easily if crop prices fall. Even now, The Andersons has seen its gross margin narrowing in each of the last five quarters, as increased selling prices for some of the company's divisions are matched by increased input costs in other divisions.

The difference between increasing revenues and improving business is most apparent when looking at sales volumes versus revenues. In The Andersons' grain, ethanol, plant nutrient, and turf and specialty divisions (i.e., all but two divisions), management notes that strong revenue gains are primarily due to price increases, while sales volumes are flat or down, in some cases precipitously.

The plant nutrient division, for example, recently saw sales volume decline 21% over last year. This is surprising, because fertilizer and other plant nutrients are in high demand right now. Mosaic (NYSE: MOS  ) and PotashCorp (NYSE: POT  ) both recently reported increases in total fertilizer sales volume of about 5.5%.

It's no surprise then that the retail division, less assisted by high commodity prices, is one of the areas where the company is actually losing money. Similar to the weak volume compared to competitors in its plant nutrient division, the retail division is also getting toasted by its competitors. Fellow agricultural jack-of-all-trades Agrium (NYSE: AGU  ) grew profits in its retail division by 56%.

The long and winding road to the shipping ports
The one area where The Andersons really has done something right is its rail division. In the last 12 months, The Andersons has reversed the losses in this division and brought net margin to 6%. Competitors American Railcar Industries (Nasdaq: ARII  ) and Freightcar America (Nasdaq: RAIL  ) are both suffering losses for the same period, despite growing revenue far more than The Andersons rail division did.

Unfortunately, the rail division is a very small source of income for The Andersons, accounting for only a sliver of total sales. Despite its strong margins, rail is thus a relatively minor aspect of The Andersons' business, and nothing to get very worked up about.

I don't wanna hold your stock
I firmly believe that agriculture-related businesses will outperform the broader S&P 500 over the next few years, and it's very possible that that will include The Andersons. If it does, however, I think it will be a result of The Andersons enjoying the same tailwind as its competitors, not because it has any particular edge on them. I've already made an outperform call on the Market Vectors Agribusiness ETF (NYSE: MOO  ) , as well as some of the top companies in the industry, on my CAPS page. Now I'm making an underperform call on The Andersons, which I believe will not outperform its competitors.

Follow me on CAPS to see how this pick performs, or add The Andersons and its competitors to My Watchlist to see how the thesis plays out.

Fool contributor Jacob Roche holds no position in any of the stocks mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 29, 2011, at 2:24 PM, blessedbyhim wrote:

    Doc, any idea why I keep losing money on great stocks like 5 star MOS, 4 star POT, and of course Agrium? I really don't understand the free-fall, can you help me out with that?

    Also, it would seem like we could just make a very successful short-term trade with COWL if we could get the timing down. What do you think?

  • Report this Comment On November 30, 2011, at 11:42 AM, TMFTheDoctor wrote:

    Fertilizer stocks (and ag stocks in general, for the most part) have been hit hard since late August mainly because of the Euro crisis and the worries about China slowing down.

    If you look at CORN it's basically the same chart pattern as for the fertilizer companies. They're highly correlated to the price of corn and the price of corn has fallen mainly for two reasons.

    One is that corn is priced in US Dollars but not exclusively grown in the US, so when the Brazilian Real, say, falls against the dollar, their corn is cheaper and so US farmers have to lower their prices to stay competitive and the global price of corn starts to fall. The USD has been strengthening lately as investors flee to safe haven Treasuries.

    The other reason is that global recession fears have increased during the Euro crisis, so there's the worry that there will be less consumption.

    I view this all as relatively short-term. The dollar will pull back before long and people will still need to eat even in a recession. Global corn supplies are dangerously low and next year's crop isn't likely to be good enough to refill them. If you don't have any positions, now is probably a good time to start one.

  • Report this Comment On November 30, 2011, at 11:59 AM, TMFTheDoctor wrote:

    I forgot to mention COWL. I was actually unaware of this ETF. It looks like COWL/COWS are both just triple plays on MOO, which I am bullish on, but I'm pretty wary of Direxion anything. If you could stomach the volatility, COWS would make an interesting long-term short however.

  • Report this Comment On November 30, 2011, at 2:26 PM, AWinvestments wrote:

    Doc,

    Thanks for your insight. I wasn't aware of the high correlation between corn prices and fertilizer stocks, but I'm learning. I'm not sure why there is such a high correlation except that perhaps corn is such a large crop in the U.S. that is resource intensive? I was thinking the same thing, perhaps now is the time to take the plunge. I've been looking at POT and Agrium. Who do you like in this group besides just MOO?

    Finally, yes, if we could even relatively time the resurgence of the ag stocks, the Direxion could be a great short atm, and the other long as ag revives.

  • Report this Comment On December 01, 2011, at 8:49 PM, TMFTheDoctor wrote:

    Corn is a massively important crop because of it's applications for biofuel, livestock feed, and as an ingredient is basically everything you buy at the grocery store. It is by far the largest crop in the United States.

    So what happens is, when the price of corn gets very high, farmers experience very high profits (because their cost of production doesn't rise nearly as much). So they have a greater incentive to plant as much corn as they possibly can and try to get the highest yield from that corn and maximize the amount they end up harvesting for sale. So they buy more tractors, pesticides, fertilizers, etc. Fertilizer is especially sensitive because they have to do multiple applications usually, and they have to use more for a bigger planting, etc. So when the price of corn is very high, fertilizer prices rise too due to the demand, and so companies like POT, MOS, etc see their stock go up in anticipation of their rising sales. And the same holds true on the way down.

    I have a number of top picks in this sector, but a good article highlight several of them can be found here: http://www.fool.com/investing/general/2011/08/16/the-best-bu.... Be sure to add my RSS feed because I focus most of my writing and attention on the ag sector.

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