Mark Krieger's  Instablog

Despite the constant threat of legal issues facing Imperial, things are starting to look up for the largest publicly held US sugar producer. The company 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  safer and  more 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 forecasted 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 a 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.

 

Since WINN emerged from chapter 11 nearly three years ago, the company has shown some significant turnaround momentum. They have nearly generated $500 million of EBITDA earnings and remodeled over 170 of its stores. The striking thing about the remodel program is they have been able to achieve one third of their entire store base using nothing but their own cash flow (the company is debt free) yet shareholder's have been left holding the bag. The truth is, the share price is near the same levels as the IPO price in Nov  of 2006. All this progress and patience  results in a big fat “zero return” for the original shareholders. What’s up with that?

Wall Street overreacted on  first quarter results: First quarter results were bad, but they were not that bad. In fact the company was able to still improve its gross profit margin from 27.9% to 28.2% despite a 2% loss in the top line. The company also  saw its transaction counts stabilize, though its basket size shrunk due to deflationary headwinds and  consumers lack of  overall confidence especially due to continued pressure on the job market. WINN’s CEO, expects the second half of fiscal 2010 will show deflation transform into moderate  inflation,  while  employment  and  the overall economy gain additional traction.

The company reduced its  EBITDA guidance range to $140 -$160 million from $170-180 million and declined to offer assistance on revenue projections. Hopefully management this time, was clever enough to sandbag expectations ( under promise) enough, to enable them to surely over deliver when it is time to report second quarter results.

 

More cannon fodder for the critics: It was revealed on the conference call that WINN’s $3.5 million impairment charge was related to a write down on two recently remodeled stores.   Write offs this soon are certainly disheartening and should not occur. WINN’s EBITDA of about 2% of sales is 300 basis points lower than its peer average of 5%. If there is a silver lining,  WINN has ample opportunity for huge improvement. Its competitors on average are producing  EBITDA at 2.5 times what WINN is delivering and if WINN is able to just improve by 100 basis points, its EBITDA would rise a staggering 50%.

 

Analyst question: As I listened to the conference call, the usual esoteric ,hypothetical and elaborate questions evolved from the slew of analysts participating , until the line of final questioning came up. The analyst, George Schultze of Schultze Asset Management, asked what we all wanted to hear.  (1)Why are the other supermarket operaters offering an improved outlook and WINN is not? (2) Wouldn’t it be a better use of corporate funds to reduce the remodel activity and use those funds to purchase back common shares in the open market? (3) Why are impairment charges being incurred against remodeled properties? (4) What G&A amount do you expect to reduce in 2010? (First quarter saw a 70 basis point spike from 27.9% to 28.6%). The CEO attempted to deal  with these questions, and did a pretty good job, but in reality, it is really hard to pull a rabbit out of a hat. The bottom line is the CEO’s responses were not what the stake owners wanted to hear.

 

Bottom line: with a market cap of only $618 million and a total of 515 stores, the market is valuing each store at a paltry $1.2 million each.  This fact is even more outrageous when you consider the company is spending up to $2 million on a single remodel project. This low valuation is certainly not warranted and appears to be a classic case of inefficiency in an efficient market. Translation: The market is wrong again and eventually the shares will be priced at much higher levels when the “market” comes back to its senses.  Adding more persuasion to the long side, the company is   certainly vulnerable as an acquisition target from a larger national operator, such as KR, SWY or SVU. 

 disclosure: Long

 Expensive is a relative term. Those on the short side would say GOOG is expensive while those holding long positions would probably argue the contrary. The fact s, GOOG has been a quite a run lately as analysts keep piling  on with continual sweetening  views, The trouble is, this could be a disservice to longs as these increased expectations increase the possibility of an eventual disappointment. The problem is, the law of bigger numbers- each time GOOG reports they are dealing with a larger comparison number from the previous year’s period. This increase in the denominator makes growth increases more difficult.

THIRD quarter earnings: GOOG is expected to report third quarter  earnings  this Thursday of $5.39 per share on sales of $4.23 billion. That represents a paltry 10% earnings growth with sales expansion at about 4%. The shares have already run up $100 in the last  threemonths alone, so there is a reasonable chance that most of the run-up has already been factored in. This could be a classic example of buy the rumor and sell the news. The love affair the analysts seem to have with GOOG  makes me wonder how much “pump and dump “ action is occurring. The simple truth is GOOG’s forward multiple at 21 times 09 estimates, is  almost 75%  higher than  IBM’s forward PE of 12

FBR capital was the latest research firm to fall all over GOOG-they raised their one year target price 23% from $535 to $660 ,yet notched  up their 2009 earnings estimates less than 1% from $21.91 to $22.03. Where is the logic here? The stock target is raised by a factor of 23 times the expected earnings gain. I guess many investors look at GOOG’s high in Dec of 2007 of $715 as attainable again. It could happen, but back then ,GOOG’s earnings were growing at four times the amount they are today, so maybe its high price was more justified back then.

Market share loss: GOOG's market share of the search market  fell for the first time in July. GOOG lost almost a 100 basis points from 78.44% to 77.54% while MSFT’s “Bing” saw its market share surge over a 100 basis points to over 9%. Although Yahoo and MSFT barely have a 20% market share between them, Many believe their upcoming partnership will enable them to grow that number further pressuring GOOG’s pricing power and dominance.

 

Bottom-line: No doubt GOOG is on a roll, but at this juncture its risk reward ratio does not warrant further investment. Earnings will be great, but will have to come in, even above the most optimistic whisper numbers to keep the shares from sliding. If GOOG misses, the shares could lose 10%-15% in a single session, falling as low as the $460 area. This  would represent a compelling entry point,  constituting about a 50% retracement from its three month staggering run from $400 to $525

disclosure: short