The Andersons (NASDAQ: ANDE) is an American company occupying a substantial part of the agricultural sector with operations spanning across commodity trading, ethanol production, plant nutrient, and rail industries.
I am bullish on the stock.
Hedging Activities
The first thing I picked up when analyzing this stock was the rapid increase in recent hedging activities.
It seems as though The Andersons has hedges against the prospect of falling commodity futures with a 2.39x surge in the company’s net derivative position compared to last year.
Furthermore, The Andersons seems worried about interest rate uncertainty and has enlarged its interest rate hedging portfolio by an astonishing 27x year-over-year. These hedging activities will likely shift a significant amount of risk, resulting in less volatile earnings during a period when commodity prices and interest rates may revert to pre-pandemic levels.
Earnings Outlook
The company itself declared a bullish outlook after it hit all-time record earnings in its third quarter in which it posted year-over-year revenue growth of 56.33%.
According to the firm’s management, high gross margins are expected to continue into 2022, with low inventory levels adding to operating profit margins. In addition, the firm also thinks harvests will be strong in the new year, and that elevated ethanol prices will continue to stay elevated, even after the maintenance season.
The fundamentals seem fairly straightforward here, and there’s nothing to overthink, in my opinion. I did, however, have a look at a few accounting measures, and it concerns me that the firm has income accruals worth $235.1 million, and deferred tax liabilities of $79.2 million.
These could be signs of aggressive earnings recognition, but I’ll give it the benefit of the doubt for now seeing as its Beneish M-score is still favorable at -1.82.
Valuation
The Andersons stock is trading at a discount relative to its sector peers. The stock’s P/S and P/B ratios are trading at discounts worth 92.6% and 58.3%, suggesting that the stock is good value for money based on its revenue generation and asset base.
In addition, the stock’s P/E ratio is trading at a discount of 35.9%, conveying to us that the market hasn’t fully priced in the stock’s earnings per share growth.
Andersons has formed a momentum pattern as it’s currently trading above its 10-, 50-, 100-, and 200-day moving averages. I expect this to persist as we experience a broad-based market surge amid stabilizing economic conditions.
Wall Street’s Input
Turning to Wall Street, The Andersons has a Moderate Buy consensus rating, based on two Buys and one Hold assigned in the past five months. The average Andersons price target of $44.33 implies 13.6% upside potential.
Conclusion
The Andersons is in great shape as it’s well hedged against any adverse market price swings. The stock is undervalued and forming a momentum pattern as we head into a promising year for the market.
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