Imperial Sugar: Is Its Surge The Real Thing?

Feb.13.12 | About: Imperial Sugar (IPSU)

I'll have to admit, I haven't seen too many stocks double in less than two trading sessions, but that's exactly what the only US publicly traded sugar company did when it saw its shares skyrocket from $3.35 to $7.59, before pulling back to $6.70. What in the world would cause Imperial Sugar (NASDAQ:IPSU) to more than double on absolutely gargantuan volume (it traded 17.1 million shares, or roughly 140% of its 11.98 million shares outstanding in a two day period)?

It can't be the fact that it is now in the late stages of finding a buyer for Wholesome (that is old news). Could it be that earnings were that much better than expected? A loss is a loss, any way you slice it, and although losing $3.5 million was better than expectations of a $7 million loss, it still does not justify a stock adding more than ten times the actual earnings difference to its market cap.

I guess the real stimulus was a miraculous 540 basis point sequential recovery in the company's gross profit margin, from a negative 4.2% to a positive 1.2% (management said the improvement was partially attributable to a 18% rise in selling prices). This margin improvement, at the very least, helped regain some very needed market confidence, leading some market participants to believe that the company is capable of making money again. On the down side, the company's SG&A costs spiked 12% from $9.6 million to $10.8 million, representing about a 10 cent hit to earnings.

Plenty of detractors: IPSU is not out of the woods yet, according to James Brumley of the Small Cap Network. His scathing piece, entitled, "Will Wholesome Save Imperial?" rips the company and justifies the latest rally as nothing more a temporary phenomenon. Could Mr. Brumley actually be stuck in a difficult short position who is trying to bash for cash? Believe me, I have been there.

Shorts overwhelmed and blindsided: It must be hard sleeping at night knowing the company you shorted has a tiny 11.98 million shares outstanding and carries the distinct possibility of either enacting a sale of a division, or being acquired. In any case, a "shorts" nightmare has became reality, as they were virtually crushed in a massive short squeeze. These guys should have booked their profits when they had a chance.

Now, most of their gains have evaporated and could quickly turn into losses, especially if they don't act fast and close out their positions (by buying to cover). Although IPSU's short interest dropped only 7% from 1.81 million shares to 1.69 million shares in the latest period, you can rest assured that the next reporting period (in two weeks) will show a substantial 30-40% drop in its short interest.

Don't get me wrong, I have nothing against shorting stocks because stocks tend to fall twice as fast and far on bad news, as they rise on good news (fear is stronger than greed). I am just advocating staying away from shorting value plays and not getting greedy. The only thing I really loathe about shorting is the fact that it exposes the speculator to unlimited risk as there is no limit on how high a stock can rise.

Wholesome is ripping it up: Many might wonder why IPSU is considering selling the "hen that laid the golden egg". Some say the sale is necessary to ward off a liquidity crisis while others argue that it is merely a quest to monetize a very undervalued asset. I think it is a little a bit of both. In its most recent quarter, Wholesome's earnings swelled 40% from $2.61 million to $4.27 million on sales of $41 million (revenues rose 35%) . Maybe IPSU will end up catching us all by surprise by buying Billington's 50% share to become its sole owner. If they could get it for $60 million, they might be able to obtain the financing. Stranger things have happened.

The conference call: There is no doubt that both the CEO and CFO have taken a beating the last six months, but during the conference call they both sounded confident, focused and in command. It was almost like you could detect the spring in their step as they addressed about five separate analysts on the call. Conspicuously absent were both Hamed Khorsand (BWS Financial) and Brad Safalow (PAA Research) as both dropped research coverage. Their unflattering track record on the company, coupled with the fact they have both thrown in the towel, could be a contrarian sign that the bulls have been looking for.

Janney Montgomery analyst (Mitchell Pinheiro) asked management how long it might take for the Port Wentworth plant to reach its full daily melt rate of about 5.9 million lbs (currently the company stands at about 4.8 ). The CFO answered that they don't forecast timeframes, but the hit on the company's gross margin is about 150 to 200 Basis points, so if you do the math, the resumption of full plant capacity could translate into as much as $20 million per year of $1.65 per share, which could be construed as a game changer. SteviaCane was also discussed and management was enthused about its prospects. It will be marketed both on a retail level (it is finally available at national chains) and to food manufactures (they are now in testing stages).

A $15 stock price?: I am not saying the shares will hit $15 any time soon, but you have to be on the side of the trend (the trend is your friend) and now that the shares are safely north of $5 again, they become legitimate for institutional and mutual fund purchases (many funds prohibit purchasing stocks at a sub $5 price). The stock also becomes eligible for margin buying, further stimulating demand. There is no doubt the shares are way overbought, so a good dose of profit taking could be in order. Be ready to buy the dips and sell the rips. Who knows? This one mind even find itself back in, as a bonified member of the "Dirt Cheap Value Portfolio".

Disclosure: I am long IPSU.