Imperial Sugar: Ultimate Value Trap, Or Jackpot In The Making?

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 |  About: Imperial Sugar Company (IPSU)
by: Mark Krieger

Many have written Imperial Sugar (IPSU) off as a surety for chapter 11. After all, the company has to deal with fluctuating commodity prices, legacy costs (pension obligations) and an expensive habit for capital expenditures. That reality, along with a liquidity scare, has literally shaved 90% off its share price in the past nine months, as many holders simply sold first and didn't even bother to ask questions later (who can blame them?).

This extreme pessimism could offer an opportunity to exploit, because in a matter of days, the company is slated to receive the proceeds from the sale of its Wholesome Sweetener's stake directly into its coffers. In fact, the $60 million windfall it will collect is surprisingly $7 million more than its entire current market cap of $52.80 million - implying that the market actually is assigning a negative value to the remainder of its assets.

Mr. Market seems to be pricing the company as if it will never be able to turn around its operations, which is simply ludicrous - much like it priced AAPL nine years ago, when it was miraculously selling below its cash holdings. Now obviously, IPSU is not selling for less than its cash value (it really has no cash), but at about a 66% discount to book value, it still offers bargain hunters a real possibility to take advantage of a very oversold situation. Don't get me wrong, this play is not without risk, but the reward potential is so great, it might just be worth contemplating as a sort of "long shot".

Although Imperial has been on a asset selling spree lately (it sold Santos, LSR and now Wholesome) it is still left with substantial resources, such as: (1) its Port Wentworth refinery and crown jewel. Unfortunately, the palnt is underperforming in terms of efficiency (current melt rate is 4.8 million pounds per day versus its pre-explosion rate of 5.4), but the company plans to spend $20-$25 million in capital improvements in fiscal 2012 to enhance output and reduce costs.

Three years ago, IPSU (the only US publicly held sugar producer) spent $225 million of insurance proceeds alone, rebuilding the packaging side of Port Wentworth that was damaged in the 2008 explosion. It is now focused on updating the process side of the refinery. (2) its Gramercy refinery small bag packaging plant - this operation has a long term pricing agreement to buy refined sugar from the LSR for resale (3) Natural Sweet Ventures-this is a joint operation with Pure Circle Ltd. to produce SteviaCane (4) SucraSeal is a new joint venture with SES Foam Inc., featuring a "green friendly" spray foam insulation product, used primarily in residential home building (5) Its Sugar Land Texas Corporate headquarters complex (it owns the real estate) (6) distribution facility in Lexington Kentucky (it does not own the real estate).

The bottom line: The stock market is skeptical that IPSU will ever regain profitability again, and you can't really blame it, because at the end of the day, the company is still subject to the whims of the commodity market, pension obligations and historically low profit margins. The good news is the sugar refiner will be essentially debt free after its Wholesome transaction closes (it owes $70 million on its bank revolver and could conceivably pay down 85% of it). It is making progress at Port Wentworth (its daily melt rate increased from 4.7 million lbs to 4.8 in its most recent period), and its gross profit margin improved 540 basis points on a sequential basis, from a negative 4.2% to a positive 1.2%.

Next month, it will be reporting its second quarter earnings, and dismal expectations, amounting to a loss of 32 cents on sales of $243 million (versus a profit of 34 cents on sales of $192 million) could be easy to surpass, especially considering its second quarter is typically its strongest, due to seasonal factors. This report could end up being a catalyst for an instant jackpot, or another dose of pain, if the results are worst than expected.

Disclosure: I am long IPSU.