Imperial Sugar: Shorts Take the Upper Hand, But Not for Long

Imperial Sugar (IPSU) has made a relentless run for the bottom lately, as this regal sounding company has lost its luster and then some. The shorts rule on this one with full control of the crown, scepter and throne. The shares have certainly been on a roller coaster, as the last two months have brought a 66% share price drop from $13 to $5, then an impressive 80% rally to the $9 area, only to crater back down to $6 in the last three days. IPSU’s volatility has been off the charts, allowing traders to make big strikes going both ways. Shorts should not get greedy at this point and think strongly about covering in order to ring the cash register before the share price swings back in favor of the longs, which should occur sooner rather than later.

Tremendous record volume: The company has only 12 million shares outstanding, yet it traded a mindboggling 7.6 million shares on Wednesday, representing a staggering 58 times its average daily volume of only 132,000 shares. What is going on? Possible scenarios are:

1. Forced selling to accommodate redemptions
2. Aggressive short selling exacerbating the selloff
3. Unfounded fear
4. Arbitrage selling
5. Anybody’s guess

The company has made nice progress: It announced it has completed the erection of three storage silos that are 50’ taller than their original silos, and its plant rebuild is on schedule to be fully completed by this fall. The company also announced a positive update on its insurance collections as well as a large sales contract received by its Mexican subsidiary, CSI.

IPSU is still rock solid, and is not in as bad a shape as the stock price would leave you to believe. If it was, it certainly wouldn’t continue paying a 28 cent cash dividend (currently yielding 3%). It holds a nice chunk of cash, has no debt, and sells at less than ½ book value. It is expected to receive $220 million of insurance proceeds to rebuild its Port Wentworth refinery into a safer more productive plant, and as much as $100 million in business interruption insurance payments. In 2006, IPSU produced almost $1 billion in revenues and earned nearly as much as today’s entire market cap. The company is the largest sugar producer in the US with a 20% market share. Its assets are vast: It owns two refineries, a distribution center in Kentucky, its corporate headquarters facility in Texas and 50% interests in CSI and Wholesome Sweetners Inc.

Short interest has been slashed: Short interest has dropped 85% from 3.1 million shares to 464,000 shares within the past 12 months. This could be a sign that the company could be stabilizing as more shorts cover to avoid a potential short squeeze. Barclay’s LLC is IPSU’s largest shareholder, controlling nearly 30% of its outstanding shares and could exert Board pressure to explore alternatives for enhancing shareholder value, such as a sale of the entire company. Possible suitors include Archer Daniels Midland (ADM), Cargill and Hershey’s (HSY). Stay tuned!

Bottom line: The stock has been hammered beyond recognition and presents a favorable risk reward scenario at this juncture. It is no doubt extremely oversold, as it has fallen too much in too short of a timeframe. It at the very least deserves some sort of "dead cat" bounce. There is simply no justification why a company this large should have a price tag of a paltry $72 million. Any good news could quickly double the share price in a matter of days. I would back the truck up on this one and then swing for the fences.

Disclosure: Long IPSU.

Comments

[stonedinvestor:]

I've been looking at this name too Mark. As more and more sodas go away from fructose and to " natural sugar " I believe there is a major trend here. Can IPSU capitalize on the unwashed pure refined aspect of sugar that Whole Foods and other natural food shops like to sell? Sugar is on the comeback trail and IPSU stands to benefit.
Thanks for the update- you may have pushed me in today!~ stoney

Mar 26 08:31 AM

[John DiStan...:]

Great write up!

Although not directly related to IPSU, SGG, a stock I hold is a Sugar ETF that tracks the price of sugar. Jim Rogers is a strong bull on the price of sugar.

I purchased some IPSU today.

Mar 26 07:02 PM

[John DiStan...:]

I took a closer look after getting home from work and have concerns about the weak cash flow, low margins and less than perfect balance sheet. For me this needs more work but will still hold my position for a trade.

Good article, thanks!

Mar 26 08:43 PM

[Mark Krieger:]

what do you mean less than perfect balance sheet? It is better than perfect: they have zero debt, $35 million in cash and are selling at 1/2 book value. Their low margin and cash flow is temporary-it is because of the closedown of thier plant due to the accident.Once the plant is back on line and at full production capacity, margins and cash flow will substantially improve.


On Mar 26 08:43 PM Shadowstock wrote:

> I took a closer look after getting home from work and have concerns
> about the weak cash flow, low margins and less than perfect balance
> sheet. For me this needs more work but will still hold my position
> for a trade.
>
> Good article, thanks!
>

Mar 27 06:43 AM

[Nathaniel C:]

Hi Mark-- I guess we found out who the seller was on March 25. It was Barclay's dumping their entire position.

I have read all of your posts about IPSU and it seems like a pretty good buy at around $7. The company appears to be dramatically undervalued based on its break up value. Based on its assets alone IPSU is worth over $25 a share. My only concern is that management is not interested in shareholder value. If they were, they would liquidate the company and sell all assets, which would be a boon for stockholders.

Based on my analysis IPSU is worth a lot more according to liquidation value as opposed to a going concern (refining sugar seems to be a volatile and competitive industry with little room for growth except for the organic lines) . Have you seen anything from management that they are serious about enhancing shareholder value?

Mar 27 03:12 PM

[Mark Krieger:]

Nathaniel:How do you know it was barclay's who sold? I don't think management cares too much about the shareholder, or else they would of already put the company up for sale.The good thing is, Management now has a ton of shares thru grants, so if they can put a deal together, they could make alot of $$$ on the stock.

Mar 27 03:51 PM

[Nathaniel C:]

Mark-- Check out sec.gov and you will see the most recent filing indicating a change of ownership.

Here is the link:
idea.sec.gov/Archives/...

Mar 27 05:10 PM