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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.