Andersons: Potential Share Price Growth In A Defensive Stock

Stock Market

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Investment Thesis

The Andersons, Inc. (NASDAQ:ANDE) dividend yield is currently 1.84%, so, for an investor looking for total return of 7.5% per year, most of that return will need to come from share price growth. Share price growth is driven by EPS growth and/or multiple expansion. Based on SA analysts’ consensus EPS estimates, ANDE EPS growth rate for the three years 2019 to 2022 is expected to average 28.99% per year. Additionally, ANDE’s current P/E ratio is below historical levels, so the share price could benefit from multiple expansion. For shares purchased at current price levels, an increase in multiples above current levels, together with achievement of SA Premium analysts’ consensus EPS estimates, would likely result in double-digit returns for an investor prepared to hold through end of 2022. Market sentiment appears to be strongly on the side of ANDE, as reflected in SA Premium ratings summary per Fig. 1 below.

Figure 1

Figure 1

Data source: Seeking Alpha Premium

Seeking Alpha’s, Steven Cress includes ANDE in his “5 Best Stocks To Buy In a Bear Market”, stating,

In preparation for a Bear Market, investors tend to reduce positions in growth stocks and increase allocations to stocks with stable earnings like consumer staples, basic transport, and specific commodities.

The main risk I see to the ANDE share price is a repeat of the historic volatility in earnings resulting in future EPS performance coming in at the lower end of analysts’ estimates. But the opposite appears more likely in the current climate, and even meeting average (consensus) estimates, and with no increase in P/E multiple, ANDE is indicated to provide double digit returns in the region of 14% through end of 2022.

ANDE is definitely a hold for existing share owners and a buy to strong buy for those looking for exposure to the Consumer Staples/Food Distributors sector/sub-sector. My usual detailed structured financial analysis follows.

Looking for Share Market Mispricing of Stocks

What I’m primarily looking for here are instances of share market mispricing of stocks due to distortions to many of the usual statistics used for screening stocks for buy/hold/sell decisions. The usual metrics do not work when the “E” in P/E is distorted by the impact of COVID-19. And if the P/E ratio is suspect, so too, then, is the PEG ratio similarly affected. I believe the answer is to start with data at the end of 2019, early 2020, pre-COVID-19 and compare to projections out to the end of 2022 or later, when hopefully the impacts of COVID-19 will have largely dissipated. Summarized in Tables 1, 2, and 3 below are the results of compiling and analyzing the data on this basis.

Table 1 – Detailed Financial History And Projections

Table 1

Table compiled by author Robert Honeywill (Data source: Seeking Alpha Premium and SEC Filings)

Table 1 documents historical data from 2016 to 2019, including share prices, P/E ratios, EPS and DPS, and EPS and DPS growth rates. Where available, the table also includes estimates out to 2025 for share prices, P/E ratios, EPS and DPS, and EPS and DPS growth rates (note – while estimates may be shown for analysts’ EPS estimates out to 2023, 2024 and 2025 where available, estimates do tend to become less reliable, the further out the estimates go. These estimates are only considered sufficiently reliable if there are at least three analysts’ contributing estimates for the year in question). Table 1 allows modeling for target total rates of return.

In the case shown above, the target set for total rate of return is 7.5% per year through the end of 2022 (see line 12), based on buying at the Feb. 11, 2022 closing share price level. As noted above, estimates become less reliable in the later years. In this case, I have input a target return based on 2022 year, which has EPS estimates from 3 analysts. The table shows to achieve the 7.5% return, the required average yearly share price growth rate from Feb. 11, 2022, through December 31, 2022, is 6.1% (line 50). Dividends account for the balance of the target 7.5% total return. Table 2 below summarizes relevant data flowing from the assumption of a target 7.5% total return through end of 2022.

Targeting a 7.5% Return

Table 2 – Targeting a 7.5% return

Table 2

Table compiled by author Robert Honeywill (Data source: Seeking Alpha Premium and SEC Filings)

Table 2 provides comparative data for ANDE, assuming share price grows at rates sufficient to provide total rate of return of 7.5%, from buying at closing share price on Feb. 11, 2022, and holding through end of 2022. All EPS estimates are based on analysts’ consensus estimates per SA Premium.

Comments on Table 2 Are as Follows

Part 1 – Consensus EPS (Case 1.1) (lines 1 to 12)

Part 1 shows the amounts the share price would need to increase to achieve a 7.5% rate of return through end of 2022. The share price would need to increase by $1.87 from the present $38.50 to $40.37 at end of 2022, for the 7.5% rate of return to be achieved.

Part 2 – Required change in P/E ratio to achieve target 7.5% return (lines 21 to 23)

Part 2 shows the amount the P/E ratio would need to increase or decrease by, from buy date to end of 2022, to achieve the share price level at the end of 2022 necessary to achieve the targeted 7.5% return. For ANDE, the P/E ratio at buy date could decrease by 5.7% through end of 2022 for the 7.5% return to be achieved. Requiring a decrease in the P/E ratio to achieve a targeted return would normally be regarded as a positive. However, due to the distortions of earnings and sentiment owing to the COVID-19 pandemic, it’s difficult to judge whether the change in P/E ratio is a positive or the result of a distorted starting point. To overcome this difficulty, in Part 3, I review the necessary change in P/E ratio from a different, pre-COVID-19 starting point.

Part 3 – Projected change in P/E ratios from 2019 to 2022 (lines 31 to 46)

In Part 3, I start with the share price on Dec. 31, 2019, before the impact of the COVID-19 pandemic on earnings and market sentiment. The end point is projected share price at end of 2022 when it’s assumed the market and earnings are no longer materially impacted by the pandemic, and EPS growth has brought the P/E ratio back closer to historical levels. For ANDE, the share price needs to increase by $15.09 from $25.28 on Dec. 31, 2019 to $40.37 at end of 2022, and as detailed in Part 1, at $40.37, the targeted 7.5% rate of return would be achieved. For ANDE, there are a number of givens in our assumptions. Using these givens, the change in the share price from Dec. 31, 2019, to end of 2022, can be expressed as mathematical formulae as follows:

(A) Change in share price, due to effect of EPS growth rate, equals share price at beginning multiplied by (1 plus average yearly Consensus EPS growth rate) to the power of number of years invested.

= $25.28*(1+29.0%)^3 = $54.25 (that would be the result if the share price grew in line with EPS growth, and the P/E multiple remained constant)

(B) Change in share price due to change in P/E ratio equals share price adjusted for EPS growth rate multiplied by (1 plus/minus percentage change in P/E ratio).

= $54.25*(1-25.6%) = $40.37 (price required at end of 2022 to provide 7.5% total return, buying at current share price)

The increase of $28.97 ($54.25 minus $25.28) due to the average yearly EPS growth rate is cumulative, and share price will continue to increase the longer the shares are held and the EPS growth rate continues. The decrease of $13.88 due to a change in the P/E ratio ($54.25 minus $40.37) has a one-off effect. A continuing high or low P/E ratio has no impact on future share price growth, only a change in P/E ratio affects share price, not the level of P/E ratio.

Next, rather than targeting a specific rate of return, I look at historical P/E ratios to see the potential impact on returns of a reversion to these levels of P/E ratio. First of all, I should explain a little about the Dividend Growth Income+ Club approach to financial analysis of stocks.

Understanding The Dividend Growth Income+ Club Approach

LogoApplied Industrial Technologies (<a href=

Dividend Growth Income+ Club logo (Copyright: Robert Honeywill 2020)

Total Return, Dividends, Share Price

The only way an investor can achieve a positive return on an investment in shares is through receipt of dividends and/or an increase in the share price above the buy price. It follows what really matters in share value assessment is the expected price at which a buyer will be able to exit shares, and expected cash flow from dividends.

Changes in Share Price

Changes in share price are driven by increases or decreases in EPS and changes in P/E ratio. Changes in P/E ratio are driven by investor sentiment toward the stock. Investor sentiment can be influenced by many factors, not necessarily stock-specific.

“Equity Bucket”

Earnings are tipped into the “Equity Bucket” for the benefit of shareholders. It’s prudent to check whether distributions out of and other reductions in the “Equity Bucket” balance are benefiting shareholders.

ANDE’s Projected Returns Based On Selected Historical P/E Ratios Through End Of 2022

Table 3 below provides additional scenarios projecting potential returns based on select historical P/E ratios and analysts’ consensus, low, and high EPS estimates per Seeking Alpha Premium through end of 2022.

Table 3 – Summary of relevant projections ANDE

Table 3

Table compiled by author Robert Honeywill (Data source: Seeking Alpha Premium and SEC Filings)

Table 3 provides comparative data for buying at closing share price on Feb. 11, 2022 and holding through the end of 2022. There’s a total of nine valuation scenarios, comprised of three EPS estimates (SA Premium analysts’ consensus, low and high) across three different P/E ratio estimates, based on historical data. ANDE’s P/E ratio is presently 15.34 which is far below historical median per Table 3 above. Comments on contents of Table 3 follow.

Consensus, low and high EPS estimates

All EPS estimates are based on analysts’ consensus, low and high estimates per SA Premium. This is designed to provide a range of valuation estimates ranging from low to most likely to high based on analysts’ assessments. I could generate my own estimates, but these would likely fall within the same range and would not add to the value of the exercise. This is particularly so in respect of well-established businesses such as ANDE. I believe the “low” estimates should be considered important. It’s prudent to manage risk by knowing the potential worst-case scenarios from whatever cause.

Alternative P/E ratios utilized in scenarios

  1. The actual P/E ratio at share buy date based on actual non-GAAP EPS for September 30, 2021, TTM.
  2. A modified average P/E ratio based on 22 quarter-end P/E ratios from Q4 2016 to Q4 2021 plus current P/E ratio. The average of these P/E ratios has been modified to exclude the three highest and three lowest P/E ratios to remove outliers that might otherwise distort the result. In the case of ANDE, I have chosen to use an assumed P/E ratio of 15.34, based on the current multiple, in place of ANDE’s historical average of 36.91. I have done this to provide an idea of the impact on returns if the multiple remained at current level through the end of 2022.
  3. A median P/E ratio calculated using the same data set used for calculating the modified average P/E ratio. Of course, the median is the same whether or not the three highest and lowest P/E ratios are excluded.
  4. The actual P/E ratio at February 21, 2020, share price, based on 2019 non-GAAP EPS. The logic here is the market peaked around February 21, 2020, before any significant impact from COVID-19 became apparent. This makes the P/E ratios at February 21, 2020, reflective of most recent data before distortion of P/E ratios by the impact of the coronavirus pandemic.

Reliability of EPS estimates (line 17)

Line 17 shows the range between high and low EPS estimates. The wider the range, the greater disagreement there is between the most optimistic and the most pessimistic analysts, which tends to suggest greater uncertainty in the estimates. There are three analysts covering ANDE through the end of 2022. In my experience, a range of 18.4 percentage points difference in EPS growth estimates among analysts is extraordinarily large, suggesting a high degree of uncertainty, and thus a measure of unreliability.

Projected Returns (lines 18 to 39)

Lines 25, 32 and 39 show, at a range of historical P/E ratio levels, ANDE is conservatively indicated to return between negative (9.5)% and 38.5% average per year through the end of 2022. The negative (9.5)% return is based on analysts’ low EPS estimates and the 38.5% on their high EPS estimates, with a 13.9% return based on consensus estimates. Those are the lowest of the returns under the consensus, low and high EPS scenarios. At the high end of the projected returns for ANDE, the indicative returns range from 53.5% to 135.4%, with consensus 93.4%. These returns are based on ANDE’s adjusted historical median P/E ratio of 26.18, calculated over the last six years. I believe the high historical median and average P/E ratios are an aberration and should not be relied on. At the same time, the current 15.34 multiple appears reasonable and might provide some room for multiple expansion. The big question on returns is whether ANDE can achieve the high or the low end of SA analysts’ forecasts, or somewhere in between. If it’s somewhere in between and consensus EPS estimates are met, and multiple remains unchanged, indicated return through end of 2022 is 13.9%. Any increase in multiple above present level would further enhance returns.

Review Of Historical Performance For ANDE

ANDE: Historical Shareholder Returns

In Table 4 below, I provide details of actual rates of return for ANDE shareholders investing in the company over the last six years.

Table 4

Table 4

Table compiled by author Robert Honeywill (Data source: Seeking Alpha Premium )

For many stocks where I create a table similar to Table 4 above, I find a wide range of returns indicating a degree of volatility and risk. Table 4 above shows the results for ANDE were double digit returns, ranging from 10.3% to 85.4%, for four of eight different investors, each investing $3,000 over the last six years and holding to the present. Another two investors achieved mid to high single digit returns. The remaining two investors had low single-digit negative returns, saved to some extent by receipt of dividends. Table 4 above shows considerable volatility in the share price, just as Table 1 shows considerable volatility in EPS over the last five to six years. This combination has contributed to the aberration in average and median multiples referred to above. These rates of return are not just hypothetical results. They are very real results for anyone who purchased shares on the various dates and held through to Feb. 11, 2022. In the above examples, the assumed share sale price is the same for all investors, illustrating the impact on returns of the price at which an investor buys shares.

Checking ANDE’s “Equity Bucket”

Table 5.1 ANDE Balance Sheet – Summary Format

Table 5.1

Table compiled by author Robert Honeywill (Data source: Seeking Alpha Premium and SEC Filings)

Table 5.1 shows an increase in net operating assets of $571 million funded by an increase of $312 million in net debt, and an increase of $259 million in shareholders’ equity, over the 4.75 years Jan. 1, 2017, to Sep. 30, 2021. Outstanding shares decreased by 5.5 million from 28.2 million to 33.7 million, over the period, due to shares issued for acquisition (Lansing Trade Group – balance not already owned) and stock compensation. Net debt as a percentage of net debt plus equity increased from 34.8% to 41.2%. Note from Table 5.1, the share price was around or below book value from 2017 to 2020 but is now comfortably above book value. From ANDE’s FY 2020 10-K filing,

The Company has considered the potential impact of the book value of the Company’s total shareholders’ equity exceeding the Company’s market capitalization for impairment indicators. Management ultimately concluded that, while the Company’s shareholders equity exceeded the market capitalization for the period, an impairment triggering event had not occurred. The Company continues to believe that the share price is not an accurate reflection of its current value. While adverse conditions are currently present and pervasive in the agriculture space during this time, the long-term outlook remains positive and management believes that the market’s impact on the Company’s equity value does not accurately reflect the impact of these external factors on the Company. As a result of prior period and annual impairment tests, reviews of current operating results and other relevant market factors, the Company concluded that no impairment trigger existed as of December 31, 2020.

The $259 million increase in shareholders’ equity over the last 4.75 years is analyzed in Table 5.2 below.

Table 5.2 ANDE Balance Sheet – Equity Section

Table 5.2

Table compiled by author Robert Honeywill (Data source: Seeking Alpha Premium and SEC Filings)

I often find companies report earnings that should flow into and increase shareholders’ equity. But often the increase in shareholders’ equity does not materialize. Also, there can be distributions out of equity that do not benefit shareholders. Hence, the term “leaky equity bucket.” I do not find this happening with ANDE.

Explanatory comments on Table 5.2 for the period July 1, 2017 to December 31, 2021:

  • Reported net income (non-GAAP) over the 4.75-year period totals to $188 million, equivalent to diluted net income per share of $6.05.
  • Over the 4.75-year period, the non-GAAP net income excludes $4 million (EPS effect $0.10) of income items regarded as unusual or of a non-recurring nature in order to better show the underlying profitability of ANDE. In ANDE’s case, the adjustment is not significant.
  • Other comprehensive income includes such things as foreign exchange translation adjustments in respect to buildings, plant, and other facilities located overseas and changes in valuation of assets in the pension fund – these are not passed through net income as they fluctuate without affecting operations and can easily reverse in a following period. Nevertheless, they do impact on the value of shareholders’ equity at any point in time. For ANDE, these items were $3 million positive (EPS effect $0.08) over the 4.75-year period.
  • There were share issues to employees, and these were a significant expense item, amounting to ~23% of non-GAAP net income. The amounts recorded in the income statement and in shareholders’ equity, for equity awards to staff, totaled $44 million ($1.40 EPS effect) over the 4.75-year period. The market value of these shares is estimated to be lower at $36 million ($1.14 EPS effect), likely due to the effects of volatility in the share price.
  • By the time we take the above-mentioned items into account, we find, over the 4.75 year period, the reported non-GAAP EPS of $6.05 ($188 million) has increased to $6.29 ($195 million), added to funds from operations available for distribution to shareholders.
  • Dividends of $101 million were adequately covered by the $195 million generated from operations, leaving a balance of $94 million added to equity. Shares to staff at market value of $36 million, and shares issued for acquisition $128 million further increased this $94 million to $259 million added to equity, per increase in shareholders’ funds per Table 5.1 above.

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