Climate Volatility Will Undermine Grain Trading But Renewables Offer Reprieve

Key Takeaways

• Intense climate volatility and rapid digitalization threaten Andersons' supply chain stability, net margins, and its core role as an industry intermediary.
  
• Regulatory shifts, changing protein preferences, and high capital needs could constrain the company's biofuel growth prospects and long-term cash flow generation.
  
• Elevated capital spending, policy reliance, and industry disruptions amplify earnings risk and revenue volatility, particularly given regional concentration and evolving agribusiness market dynamics.

Catalysts

Operates in trade, renewables, and nutrient and industrial sectors in the United States, Canada, Mexico, Egypt, Switzerland, and internationally.

• While Andersons is positioned to benefit from long-term growth in global grain demand and rising protein consumption, the company's high exposure to volatile weather patterns driven by intensifying climate change could lead to frequent supply chain disruptions and unpredictable operating income, putting future revenue stability at risk.
  
• Despite regulatory support and increased opportunities for renewable fuels like ethanol-which could drive higher margins and tax credits for Andersons' Renewables business-future sentiment around decarbonization efforts and shifts toward non-grain-based alternative proteins may over time reduce market size for traditional grain-based biofuels, impacting long-run revenue growth.
  
• Although the company is investing in digital transformation and agtech to enhance efficiency and competitiveness, the accelerating pace of automation and digital supply chain solutions across the industry risks eroding Andersons' intermediary role, potentially pressuring net margins if they are outpaced by larger or more technologically advanced competitors.
  
• While Andersons' disciplined M&A and expansion into value-added products have the potential to improve earnings quality and boost net margins, persistent high capital intensity and working capital requirements in their grain storage and trading businesses could limit free cash flow generation-especially during cyclical downturns or credit tightening.
  
• Even though enhanced export infrastructure, such as at the Port of Houston, could provide scale advantages for grain and meal exports, ongoing industry consolidation and direct farm-to-market digital platforms threaten to compress elevation and handling margins, adding risk to Andersons' ability to grow or defend long-term earnings.

Andersons Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Andersons compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Andersons's revenue will grow by 4.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.7% today to 1.2% in 3 years time.
• The bearish analysts expect earnings to reach $160.6 million (and earnings per share of $4.62) by about August 2028, up from $80.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, down from 16.0x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 22.3x.
• Analysts expect the number of shares outstanding to grow by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Andersons Future Earnings Per Share Growth

Risks

• Persistent volatility and uncertainty in global agricultural commodity markets, such as oversupply of grain, weak export demand, and unpredictable weather, may create earnings volatility and pressure both revenue and net margins over the long term.
  
• High capital intensity and substantial increases in capital spending including major construction and acquisitions recently funded partly through increased debt could erode free cash flow and put additional strain on future earnings if anticipated returns or synergies are delayed or under-delivered.
  
• Andersons' exposure to the U.S. Midwest for a significant portion of its grain and asset network keeps the company vulnerable to regional risks, such as adverse weather and regulatory changes, potentially impacting revenues and increasing income volatility in its core agribusiness and renewables segments.
  
• The company's reliance on policy-driven tailwinds, such as regulatory support for renewable fuels and the receipt of tax credits like 45Z, introduces long-term uncertainty to earnings if policy support weakens or credits are not secured or sustained as expected.
  
• Industry consolidation and the rise of direct farm-to-market trading platforms threaten traditional grain merchandising margins by putting pricing power under pressure, while the continued digitization and automation in agribusiness may erode Andersons' intermediator role, leading to declining core revenues over time.

Valuation

• The assumed bearish price target for Andersons is $40.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Andersons's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $55.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $13.2 billion, earnings will come to $160.6 million, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $37.94, the bearish analyst price target of $40.0 is 5.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.