ADM Archer Daniels Midland Company

We maintain our Neutral recommendation on The Andersons Inc. (ANDE), which is a diversified company operating in five different business segments ranging from buying, selling and storing grain to leasing railcars and running retail stores catering to the latest home hardware needs.

The Andersons Inc. reported third-quarter EPS of 59 cents, a substantial improvement over 8 cents reported in the year-ago quarter and way ahead of the Zacks Consensus Estimate of 17 cents. The outperformance was led by the Grain & Ethanol and Plant Nutrient Groups.

Total revenue in the quarter was $938.7 million, up 33% from $706.8 million in the prior-year quarter, missing the Zacks Consensus Estimate of $1 billion. The year-over-year improvement was primarily driven by higher sales across the company’s segments and price increases in its agricultural businesses.

Most of the company’s revenues are derived from the Grain & Ethanol group. Therefore, the company undertakes constant efforts to upgrade the business while strengthening its market position in the face of growing competition. As part of the process, in the third quarter, the Grain Division entered into a grain merchandising agreement with Trotter, Inc., of Arcadia, Nebraska, which provided the Grain Division with an additional 3.3 million bushels of storage space in Nebraska.

In addition, multiple operational updates were made at several grain facilities resulting in increased storage capacity. Further, two new bins at the grain facility in Delphi, Indiana increased the amount of storage capacity by 1.5 million bushels. The Reading and White Pigeon, Michigan facilities increased capacity by an additional 1.5 million and 730 thousand bushels, respectively.

Several handling agreements however were also terminated,  which removed 5.3 million bushels of capacity. This brings the total storage capacity to approximately 109 million bushels as of September 30, 2011 compared  with 107 million bushels as of December 31, 2010.

In the third quarter of 2011, the company completed the acquisition of Immokalee Farmers Supply Inc., Immokalee, Fla., which serves the specialty vegetable producers in Southwest Florida. As per the agreement, the Immokalee Farmers Supply operations will become a part of The Andersons Plant Nutrient Group's Southern Region.

This agreement reinforces The Andersons' commitment to the Florida market and its intention to diversify its product and service offerings for growers and industries in this specialty-crop dominated state. The new venture will allow Anderson to better serve its customers with new products and provide the additional resources needed in its markets.

There is a lot of scope in the company’s rail group business as well. The company ranks eight among privately-owned fleets in the U.S. It deals with a wide and diversified variety of cars and locomotives to meet any shipping need for serving a large customer base.

Andersons made a minor but crucial investment in the Iowa Northern Railway Company (IANR) and its subsidiaries. The company's objective is to improve its customer base further and to ensure a sustained profit growth.

During the third quarter of 2011, new railcar repair shops were opened in San Diego, California and Aberdeen, Washington on the Rail America rail lines and Waterloo, Iowa on the Iowa Northern Railway Corporation rail lines. Rail plans to continue pursuing growth opportunities through portfolio purchases, expansion of repair facilities, and other possible prospects.

However, the impact of the generally weak economy on the company’s Retail group remains a concern. Andersons is witnessing a decline in customer count as well as lower average sale per customer, as customers are cutting down on discretionary spending. Stiff competition, especially from the mass merchandisers and do-it-yourself home centers, has also added to the company’s concerns.

Consequently, Andersons has not achieved much improvement in this segment. Back in 2009, it was even forced to close down its retail store “Lima” in Ohio.

Andersons’ Grain & Ethanol and Plant Nutrient Groups buy, sell and hold inventories of various commodities, some of which are readily traded on commodity futures exchanges. In addition, its Turf & Specialty Group uses some of these same fertilizer commodities as base raw materials in manufacturing golf course and landscape fertilizer.

Unfavorable weather conditions, both local and worldwide, as well as other factors beyond our control, affect the supply and demand of these commodities and expose us to liquidity pressures to finance hedges in the Grain business in the rapidly rising markets.

In its Plant Nutrient and Turf & Specialty Groups, changes in the supply and demand of these commodities also affect the value of inventories that we hold, as well as the price of raw materials as the company is unable to effectively hedge these commodities. Increased costs of inventory and prices of raw material decrease our profit margins and adversely affect its results of operations.

The Andersons competes with Archer Daniels Midland Company (ADM), CHS Inc. (CHSCP) and privately held Cargill, Incorporated.

 
ARCHER DANIELS (ADM): Free Stock Analysis Report
 
ANDERSONS INC (ANDE): Free Stock Analysis Report
 
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