Andersons: Beneficiary Of Trends In Agriculture, Potential Upside

Introduction

Shares of The Andersons (NASDAQ:ANDE) have risen +6.2% YTD. Rising macro and geopolitical tensions are fueling higher prices for the core commodities the company sells. The company continues to show the market a stable growth in revenue and operating margin, however, the shares reacted poorly to the company’s strong results. In my personal opinion, at the moment the market does not assume that current prices will remain at a stable level. I decided to make my own assumptions and make a forecast of future cash flows to determine the fair price of the share if prices in the agricultural segment remain at a consistently high level in 2023.

Revenue model

Despite the fact that the company posted strong results in 3Q 2022, the company’s stock reacted poorly to strong reporting, so I decided to do my own analysis and make forecasts of future cash flows to determine the fair share price.

When forecasting the results of a company like The Andersons, the key points are expected sales volumes and expected sales prices, which are closely related to the macro and geopolitical situation in the world, as well as the balance of supply and demand for basic agricultural commodities.

To forecast the company’s revenue and gross margin in future periods, I single out 3 main segments, such as:

1) Trade

2) Renewables

3) Plant Nutrient

You can see the share of each segment in the total revenue of the company in the table below.

Trade segment

I believe, in line with management comments, that the continued supply/demand imbalance in soft commodities due to continued inflation and ongoing conflict in Ukraine will support prices for the company’s core commodities. As a result, in my personal opinion, the company will be able to both increase sales and remain the beneficiary of rising commodity prices. I expect the current gross margin to remain at 3.3% in Q4 and 2023 and decline to 3% by 2026.

Renewables

In my forecasts, I also expect continued growth in sales volumes and realized prices due to ongoing macro and geopolitical tensions. Rising gas prices are helping to maintain high ethanol prices as a result of reduced gas supply due to declining gas supplies from Russia. As such, I expect renewables revenue growth to continue at 15% in 2023 due to rising prices and volumes, and a further decline in revenue growth to 7% through 2026.

Plant Nutrient

In the segment, I also expect positive trends in 2023 against the backdrop of continued growth in fertilizer prices. I predict a stable gross margin of 14.9% in 2023 and a further decline to 14% by 2026.

Revenue model (Quarterly)

Revenue model (Yearly)

Projections

Thus, the company’s revenue will show growth at the level of 15% by the end of 2023, then the company will continue to grow at the level of 7% until 2026.

According to my input, the company will continue to see its gross margin decline from 4.1% in 2023 to 3.8% in 2026 due to the high base of past years. I believe that the imbalance in the world market will normalize.

I predict expenses for SGA (% of revenue) at about a stable level. In my opinion, expenses (%) of revenue) will increase from 2.6% in 2023 to 2.8% by 2026 due to lower prices for basic products.

Quarterly projections

Yearly projections

Valuation

I prefer to use the DCF method to value a company because:

1) The DCF model allows you to take into account the increase or decrease in prices and volumes for the main goods and services of the company, which allows you to predict future cash flows more accurately

2) DCF model allows you to make assumptions about the future level of operating costs

3) The company operates in a stable sector where the use of DCF is most preferred

4) The company has a long period of historical data, based on which I can make assumptions

In my model, I use the following inputs for scoring:

WACC: 8.7%

Terminal growth rate: 3%

In addition, I calculated P/E and P/S multiples based on my sales and net income projections. You can see the results of my multiplier calculations for the company in the table below.

Drivers

Rising prices: rising prices for the company’s goods and services could have a positive impact on revenue dynamics in future periods, which could support the share price.

Volume Growth: an increase in sales volumes could also support the company’s top line.

Margin: decrease in inflation may support the dynamics of the operating profitability of the business due to a reduction in the growth of operating costs (labor costs).

Risks

Margin: an increase in inflation may contribute to an increase in operating costs, which may have a negative impact on the operating profitability of a business

Prices and volumes: a decrease in prices for basic goods due to the normalization of the balance of supply and demand in world markets, a decrease in sales volumes due to increased competition may have a negative impact on the dynamics of the company’s revenue and profitability in the following periods.

Conclusion

At the moment, the company is the beneficiary of current trends in agriculture. In my personal opinion, the imbalance in global markets will continue in 2023, which will help maintain high prices for the company’s goods, which may have a positive impact on the dynamics of revenue and operating profitability of the business. So, according to my model, the fair share price is $44 with an upside potential of 21%.