Imperial Sugar: Spike in Sugar Prices Sweetens Prospects

Despite the constant threat of legal issues facing Imperial, things are starting to look up for the largest publicly held US sugar producer. Imperial Sugar (IPSU) has completed the total rebuild of its Port Wentworth Refinery into a modern “state of the art” facility. The plant, which is expected to be fully operational by the end of the month will enable Imperial to refine and package sugar more safely and efficiently than the old plant.

The perfect storm: Sugar has recently climbed to historically high levels on the commodity markets .The spread between the cost of raw sugar and refined sugar has never been greater, enabling the company to hit the “sweet spot.” Although the company’s cost of raw sugar rises, the refined sugar segment rises at an even greater percentage, enabling them to significantly fatten up their gross profit margin potential. To make matters even better, the cost of natural gas has plummeted nearly 50% in the past four months (the company uses tremendous amounts in the refining process). The combination of low input costs, elevated selling prices and a higher efficiency plant sets up IPSU for a golden opportunity that probably comes around "once" every ten years.

Fourth Quarter results: IPSU is set to report fourth quarter results next month. IPSU’s lone analyst (BWS Financial) has forecast the company to report a loss of 45 cents a share on revenues of $161 million. This could be on the light side, as the analyst, Hamed Khorsand, has historically been on the “side of caution” when modeling his forecasts, so I wouldn’t be surprised at all if IPSU pleasantly surprised the “Street”.

A web site specializing in investment ideas, named “pleaseactaccordingly.com” has taken a special interest in IPSU and has written several compelling pieces about its investment merits. The firm has established a one year $20-25 price target and “top pick” status.

Lawsuit jitters: Let’s face it, the reason the stock price is so cheap is the threat that IPSU’s insurance won’t cover all the lawsuits the company is facing from its Port Wentworth disaster. If this lawsuit cloud was cleared, the shares would likely be trading at twice their current price. The fact is, this scenario is creating inefficiencies in an efficient market that prudent traders should exploit at will. The company had a $100 million general liability policy, as well as workers compensation liability coverage in effect at the time of the accident, so there appears to be adequate coverage to handle the forty or so lawsuits in the pipeline.

Bottom line: IPSU should report better than expected fourth quarter earnings. If current trends continue, sales could top the $1 billion mark and earnings reach north of $3.00 in fiscal 2010- equating to a forward multiple of only four times earnings estimates, certainly a compelling value and quite a feat for a company with a tiny market cap of only $165 million. Add in the possibility of some scared shorts running for cover, and you have the recipe for a good old fashioned short squeeze. IPSU’s short interest has rocketed 14% in the last period to 424,000 shares, or 4% of its outstanding shares. A run to the $30 mark is certainly a strong possibility, but that will only occur if the lawsuits are settled favorably. I think they will be.

Comments

[Mark Krieger:]

A couple of points I need to drive home that were not included are: (1) IPSU is getting $210 to $225 million million in insurance proceeds to rebuild its plant--- The damage to the plant was $13 million net impairment against book value. So the company will eventually have to show a large gain of as much as $212 million or $18.00 per share (2) The company expects to receive from $60-70 million in business interruption proceeds-this could be settled as early as the current quarter.--this could result in a gain of about $6.00 per share.About income tax: the accountants have some clever ways of avoiding the tax liability from these gains( they place the gains in a deferred column)

Nov 03 07:19 AM

[China Expert:]

Some very good points...also...contri... to the "perfect storm" is the fact that currently old sugar and gas contracts are expiring allowing Imperial to realize higher, besides regular dividends, Imperial paid special dividends of:


Jan 3, 2008 $2.50
Jan 5, 2007 $3.00
Nov 11, 2005 $2.50

Nov 03 09:00 AM

[China Expert:]

Some very good points...also...contri... to the "perfect storm" is the fact that currently old sugar and gas contracts are expiring allowing Imperial to realize higher sugar prices and lower gas prices. During the last "perfect storm" besides regular dividends, Imperial paid special dividends of:


Jan 3, 2008 $2.50
Jan 5, 2007 $3.00
Nov 11, 2005 $2.50

Nov 03 09:02 AM

[Mark Anthony:]

I looked at IPSU a long while ago because I liked sugar and I wanted to find a sugar player. At the time IPSU was at $20. I looked at it and could not find it attractive. IPSU really is not a true sugar producer, but a mere sugar processor, or refiner. Is there any good reason that higher sugar price will leads to better revenue and profit of IPSU?

Nov 05 01:27 PM

[Art Trader:]

Finally, someone covering this company - a sugar refiner with the newest, most efficient equipment in the industry (paid for by insurance money) should be able to keep better than average margins.

Nov 05 01:45 PM