I'm Not Convinced This Company Will Survive 2012

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Just because it's sweet doesn't mean it's good for you!

Just ask the shareholders of Imperial Sugar (Nasdaq: IPSU  ) and they'll probably tell you that the outlook on this company went stale years ago. Since peaking at $25.68 in early August, shares have since nosedived by 87%. In comparison, the Dow Jones Industrial Average gained 4% since early August. It might hard to believe that things could possibly get worse for the refined sugar producer, but last week they did.

On Friday, Imperial Sugar wrapped up another year of steep declines, perpetuating a streak of operating losses dating back to 2008 (a one-time insurance gain of $278.5 million was recognized in 2010, otherwise the company was operational, not profitable). At the heart of Imperial's problems is the rising cost of sugar, which currently sits at prices that are double what they were three years ago when Imperial's losses began. Competitors aren't making it easy, either. Price undercutting from predominantly private competitors is eating into already constricted gross margins.

But it's not just the rising price of raw materials that has me concerned about Imperial's future -- it's the company's rapidly deteriorating balance sheet. At this time last year Imperial Sugar could claim $22.8 million in cash. Due to rising expenses and weak sales, that cash balance ended the current quarter at just $134,000. CEO John Sheptor even noted, "Our operating results and the impact of high sugar prices on working capital have strained our financial resources and we are exploring opportunities to improve liquidity, including potential further asset sales." Those aren't words of optimism, but of a desperate CEO looking frantically for solutions to a three-year-long problem.

Even though there aren't any publicly traded direct competitors, I decided to take a closer look at confectionary giant Hershey (NYSE: HSY  ) to see if rising raw material costs were affecting it much. The answer was simple: no. Hershey has been able to adapt to rising input costs by passing along price increases to consumers and adjusting their production to match demand. Imperial Sugar simply doesn't have the pricing power or the ability to ramp up production even if it wanted to.

And pricing power is really what it comes down to with regard to who can and who can't survive rising commodity costs. Unfortunately, a company like Imperial Sugar generates little brand equity and switching costs are low. Compare that to strongly branded companies like Kraft (NYSE: KFT  ) and General Mills (NYSE: GIS  ) , both of which have been able to successfully pass on higher commodity costs to consumers through a variety of price hikes and creative packaging solutions.

Despite a recent slip in profits by General Mills, their position is far from Imperial sugar's cash-strapped nightmare. The big news out of Kraft for 2012 is their upcoming split into two companies. Investors should be sure to watch this development carefully. Either way, these companies illustrate the value of brand strength. A company like Imperial Sugar has very little. In this case, it's the difference between surviving and dying in 2012.

Looking ahead to 2012, I can't say that things are looking too good for Imperial. The cash crunch is getting awfully close in the rearview mirror and sugar prices aren't indicating things are going to get any easier anytime soon. I, for one, am not convinced that Imperial Sugar has enough cash to survive the year, and I am going to back up that assertion by making an underperform CAPScall on the stock.

While 2012 may look dour for Imperial Sugar, it certainly doesn't for the Motley Fool's top stock for 2012. We've profiled this stock in a special free report. In it we talk about why this "Costco of Latin America" is poised for monster growth. You can access the report by clicking here.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He is an avid fan of just about any dessert. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that doesn't sugarcoat the truth.

Read/Post Comments (7) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 09, 2012, at 12:35 PM, expoiltthespread wrote:

    the author fails to reveal that IPSU owns 50% of Wholesome Sweeteners that is growing at a very nice pace and earned $11 million last year, At a 20 multiple, that would equate to a market value of $220 million or $110 million for IPSU's share. I think with that kind of asset behind them, and realizing it is being marketed for sale, the company will have adequate liquidity for many years, once that asset (wholesome) has been monetized. Don't count this one out yet!

  • Report this Comment On January 09, 2012, at 1:28 PM, mahram11 wrote:

    exploit where do you get your 20 time multiple from. No sweetner company or sugar company has ever been paid 20 times multiple for the company. Imperial couldnt even get full value for its share of Lsr when they had 2 willing buyers. and at the same time could only get 14.8 MM upfront, and the rest paid over 22 months. They even value whole at 16.8MM so you tell me where do you get your valuation from.

  • Report this Comment On January 10, 2012, at 8:06 AM, geekytoo wrote:

    True, IPSU is running out of cash. What has it done about it? It sold its 1/3 share in the Gramercy sugar refinery. That gave the company money and time to work toward a solution to its cash crunch problem. The sale of Gramercy netted $18 million of which $14 million was cash in hand. At the start of the venture, the contribution of each partner was approximately $30 million, so the return on investment here was poor.

    Shareholder equity is $161 million or approximately $13/sh. Liquidation would probably entail selling at a distressed price. However, the difference between $3/sh and $13/sh is enough to suggest that some value exists in IPSU.

    It's true the company may not be a going concern a year from now, but there are ways to extract value from it and this value is in excess of the current price.

  • Report this Comment On January 11, 2012, at 10:38 AM, Tipperootennis wrote:

    Seems as if they should spin off their share of Wholesome Sweetener, eh?

  • Report this Comment On January 12, 2012, at 3:22 PM, expoiltthespread wrote:

    this article says it all about IPSU's goose that lays the golden egg!

  • Report this Comment On February 11, 2012, at 11:55 PM, getrichdietrying wrote:

    what made it jump so high?

  • Report this Comment On February 12, 2012, at 12:15 AM, getrichdietrying wrote:

    "this article says it all about IPSU's goose that lays the golden egg!

    seekingalpha article is crazy intuiting that the sale of Wholesome Sweeteners would fetch 200million when in reality it earns 4.5million in guaranteed profits a year. Why would anyone even if it was yourself that rich to be able to afford it pay 20times profit or even 5 times profit


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