Just because it's sweet doesn't mean it's good for you!
Just ask the shareholders of Imperial Sugar
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
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
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.
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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.