The Andersons Inc. (ANDE) delivered EPS of 8 cents in its third quarter ended September 30, 2010, falling short of the Zacks Consensus Estimate of 23 cents per share but was a penny ahead of 7 cents in the year-ago quarter. The year-over-year improvement reflects strong operating results at the Plant Nutrient Group.

Total revenue of $707 million, however, surpassed the Zacks Consensus Estimate of $672 million and was 18% above the year-ago revenue of $601 million driven by top-line growth across all segments barring the retail Group.

Cost & Margin Performance 

On an annualized basis, cost of sales surged 19% to $654 million in the quarter and, based on revenues, increased 100 basis points to 92.5%. Gross profit increased 4% to $53 million but gross margin slipped 100 basis points to 7.5%.

On the other hand, operating, administrative and general expenses improved 2% to $50 million in the quarter and, based on revenues, increased 140 basis points year over year. Andersons reported an operating income of $3 million, reversing the year-ago operating loss of $0.3 million.

Segment Performance

The Grain & Ethanol Group posted an 11% year-over-year increase to reach revenues of $498 million. Despite an increase in revenues, the segment’s operating income dropped 72% to $2.4 million in the quarter. The grain business benefited from increased gross profit on grain sales due to the early harvest.

However, it was more than offset by a significant decrease in space income due to basis losses. The ethanol results recorded a modest loss this quarter as the company had previously contracted for ethanol sales at minimal margins added to rising input prices and higher maintenance and repair costs.

Plant Nutrient Group’s revenues increased 83% year over year to $129 million. Re-stocking of the nutrient pipeline driven by rising grain prices, an early harvest, and favorable application weather throughout the Midwest spurred a 60% increase in volume. The segment reported an operating profit of $1.5 million, reversing the year-ago quarterly loss of $2.8 million on the back of price escalation.

Revenues at Turf & Specialty Group increased 8% year over year to $23 million. The segment reported a loss of $0.3 million, compared with an adjusted loss of $1.6 million in the year-ago quarter. Anderson had recorded a $1.3 million non-recurring gain in the prior-year quarter, including which, the year-ago loss was $0.3 million.

Rail Group’s revenues upped 5% year over year to $22.3 million. The segment reported an operating income of $0.85 million in stark contrast to the operating loss of $1 million in the year-ago quarter.

Revenues at Retail Group declined 9% to $34 million. The segment reported a loss of $1.6 million, an improvement from $2.3 million in the year-ago quarter.

Financial Position

As of September 30, 2010, Andersons had cash and cash equivalents of $25.7 million, substantially lower than $204.62 million as of June 30, 2010. As of June 30, 2010, the debt-to-capitalization ratio increased to 45.3% from 38.9% as of June 30, 2010.

Our Take

Given the Plant Nutrient Group’s performance so far in 2010, it seems to be gearing up to deliver its second best performance after record results in 2008. The segment had delivered a record second quarter. Historically, the segment registers little or no income during the third quarter, a trend that was overwhelmingly reversed in this reported quarter.

Even though the average utilization rate went down for the Rail Group in the quarter, it witnessed a pick-up in the railcar leasing activity at the end of the quarter thereby lifting its utilization rate. We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.

Maumee, Ohio-based Andersons is a diversified company operating in five different business segments ranging from buying, selling and storing grain to leasing railcars and running retail stores catering to the latest home hardware needs. The segments are: Grain & Ethanol Group, Plant Nutrient Group, Retail Group, Rail Group and Turf and Specialty Group.

 
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