Skyland Grain Expansion And Renewables Investments Will Strengthen Future Operations

Key Takeaways

• Andersons' expansion with Skyland Grain strengthens North American ag supply chain presence, enhancing grain origination, merchandizing, and revenue growth.
  
• Investments in renewable production efficiency and carbon reduction projects promise increased earnings, operational efficiency, and improved margins via synergies and tax credits.
  
• Lower ethanol margins, grain prices, trade tariffs, and regulatory challenges pose risks to Andersons' future earnings across Renewables and Agribusiness segments.

Catalysts

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

• Andersons' recent geographic expansion with Skyland Grain is expected to solidify its presence in the North American ag supply chain, leading to increased grain origination and merchandise activities; this should positively impact revenue growth.
  
• Continued strong performance in the Renewables segment, driven by production efficiency and yield improvements, is set to bolster earnings despite lower market values of ethanol and co-products.
  
• The integration and optimization of Skyland operations are anticipated to enhance operational efficiencies and potentially increase net margins due to synergies, with a forecasted EBITDA contribution between $30 million and $40 million, boosting overall earnings.
  
• Potential internal growth projects, such as the expansion of soy meal exports from the Port of Houston, are expected to drive incremental revenue and enhance long-term profitability despite limited short-term capacity.
  
• Planned investments in reducing the carbon intensity of ethanol production, through projects like carbon sequestration and heat and power generation, could provide financial benefits via tax credits, thus improving net margins and earnings.

Andersons Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Andersons's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 1.3% in 3 years time.
• Analysts expect earnings to reach $167.2 million (and earnings per share of $4.83) by about March 2028, up from $114.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, up from 12.9x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 24.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.83%, as per the Simply Wall St company report.

Andersons Future Earnings Per Share Growth

Risks

• Lower ethanol board crush margins and reduced co-product values have negatively impacted the Renewables segment, which poses a risk to future earnings.
  
• The expectation of lower relative grain prices and reduced farmer engagement presents a challenge to the Agribusiness outlook, potentially impacting revenue and margins.
  
• Oversupplied agricultural markets with relatively low prices and limited volatility have affected the company's profitability and might continue to exert pressure on margins and revenue.
  
• The potential outcomes of trade tariffs, especially those affecting the U.S., Canada, and Mexico, could introduce volatility and uncertainty, impacting revenue streams within the Trade segment.
  
• Investment in new growth opportunities requires clear regulatory guidance, particularly concerning tax credits for ethanol production, presenting a risk if regulatory changes are unfavorable or delayed, potentially impacting earnings and cash flow.

Valuation

• The analysts have a consensus price target of $62.5 for Andersons based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $70.0, and the most bearish reporting a price target of just $55.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.7 billion, earnings will come to $167.2 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 6.8%.
• Given the current share price of $43.61, the analyst price target of $62.5 is 30.2% 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.