Imperial Sugar's New Clothes

I've got to hand it to the management team at Imperial Sugar (NASDAQ:IPSU): These folks know their chickens. If you're not familiar with that Italian saying, let me rephrase: These folks know their business. And while I haven't always been a big supporter of this management team, it's hard to look at a stock price chart and not say something along the lines of "dang ."

Imperial Sugar continues to benefit from supply disruptions in the sugar business and healthy refining margins. Revenue jumped about 29% in the second quarter as the company coupled 11% higher volume with better than a 16% improvement in realized pricing. In other news, the gross margin improved significantly (to 11.4% from 4.9%), and operating income was considerably better than in the year-ago period. As for cash flow? Well, free cash flow was far lower (because of working capital changes), but structural free cash flow was much better.

The good news/bad news here is that the market in which Imperial Sugar operates is volatile and subject to interference from government trade policy. There's also the fact that the company does a fair bit of business under contract, and those contracts don't adjust immediately.

On the supply side, sugar is definitely a weather-sensitive crop. Australia took a hit from storms earlier this year, and there's at least a chance that India's crop could suffer from an adverse monsoon season. And then there are risks in our hemisphere as well -- namely that hurricanes could roar into the Caribbean and Central American growing regions.

Then there's also the perception of ethanol. While the impact of ethanol on Imperial Sugar's business is not quite as cut and dried as some might think, it's still true that there's only "x" amount of sugarcane grown in a given year. It seems logical, then, that diverting more of that to ethanol production should move prices up.

At today's prices, I'd be a little nervous about making a huge bet on Imperial Sugar. Then again, I said the same about copper companies not that long ago and lived to regret it. As long as refining margins stay strong, Imperial Sugar will be in good shape -- but if those margins shrink, the good times could turn sour again.

For more sweet Foolishness:

• A Sour Offer for Imperial Sugar
• A Sweet Deal for Imperial?
• Sugar Firms Not Sweet on Cuts

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).