by Debra Fiakas CFA
The Andersons (ANDE: Nasdaq) is not one of the first companies that comes to mind as an alternative energy company. However, ANDE has been in the Ethanol Group in our Beach Boys Index for some time. Ethanol is one of six revenue sources for The Andersons, contributing $743 million to the top line in the year 2012. That represents about 14% of The Anderson’s total revenue base. The company produces ethanol in four plants located in the Midwest with a production capacity of 330 million gallons per year.
|The Andersons Clymers Ethanol
Plant, Logansport, Indiana
Unfortunately, the ethanol segment is not consistently profitable. In 2012, the company disclosed a $3.7 million operating loss on the $743 million in ethanol sales. This follows a small profit of $23.3 million in 2011. The ethanol operations were hit by narrowing profit margins, but the real problem in 2012 were substantial losses in unconsolidated operations, in which The Andersons have invested but do not have control.
All of the company’s other five segments are profitable. Consequently, The Andersons has delivered profits in every one of the last ten years. In the most recently reported twelve months The Andersons reported a net profit of $73.6 million on $5.7 billion in total sales. Cash generated by operations totaled $402.9 million, representing a sales-to-cash conversion rate of 7.1%.
Unfortunately, the consistency in earnings and cash flow has not impressed investors. The stock trades at 17.6 times trailing earnings, while other food commodities companies trade near 22.0 time earnings. ANDE trades at lower multiples of sales, cash flow and book value as well.
Alternative energy companies have been slow to achieve profitability. They frequently operate at a loss for so long it is necessary to raise capital, diluting the equity positions of early investors. It makes sense to take an alternative strategy – invest in established companies that have integrated alternative energy projects into conventional operations.
A review of historic trading patterns in ANDE suggests the stock has developed enough momentum to reach a stock price near $86.00. This target price represents 25% upside from the current price level. It is also a multiple of 15.7 times the 2014 consensus estimate – well below the company’s peer group. A forward dividend yield of 0.9% is better than a poke in eye with a sharp stick.
Thus a position in ANDE gives investors consistent financial performance at a decent price from a company that has its foot in the door of alternative energy.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.