Can Imperial's Sugar High Last?

A need for its product due to a bad sugar beet crop and Hurricane Katrina has helped the refiner to better its once-souring fortunes

For the last few months, investors in Imperial Sugar (IPSU) have been on a trip to candyland. A rare public outfit in a closely held industry, the Sugar Land (Tex.)-based refiner hit a 52-week high of $35.85 on Apr. 5 before investors soured a bit on the shares, which declined to around $33.69 in midday trading Apr. 6. Even at that level, the share price has more than tripled from its 52-week low reached last May.

The stock's volatility illustrates the stickiness of sugar investing. Prices are unpredictable, and a company's grip on profits is only slightly more solid than its ability to control the weather.

In 2005, Imperial, which sells to food manufacturers and wholesalers, benefited from factors as disparate as a thin sugar beet crop, Hurricane Katrina, and the attentions of a New York buyout firm. After the smaller-than-usual beet crop last year, sugar refiners focused on the cane crop, but Southern growers suffered from the harsh hurricane season. It was an ideal situation for a cane sugar refiner like Imperial. Combating a potential shortfall, the U.S. Dept. of Agriculture increased its quotas on raw sugar imports. The decision brought in a new supply of cheap raw sugar in need of refinement.


  Imperial shifted its buying to imports, and the price of raw sugar remained low. But the refining margin, the difference between the price of raw and refined sugar, grew. According to the USDA, wholesale refined beet sugar jumped from 26.75 to 40.1 cents per pound from August to September -- and the price has remained high, about 37.1 cents a pound last month.

Can this be sustained? Looking forward, Imperial CFO Hal Mechler says "There's still a very significant tightness in the marketplace," but industry experts say it's impossible to know how long it will remain that way. The company knows from experience how volatile sugar can be. Overleveraged during a sugar glut, Imperial declared bankruptcy in January, 2001, emerging from Chapter 11 a few months later.

Before the price of refined sugar skyrocketed in September "prices had been essentially flat for about 20 years," says Jack Roney, director of economics and policy analysis at the American Sugar Alliance. The current high prices give the industry "the chance to obtain a little bit of profitability."


  It certainly worked out that way for Imperial. For the quarter ending Dec. 31, the approximately $345 million market cap outfit pulled in net income of almost $12 million in the fourth quarter of 2005 up from $6.5 million in 2004, even as domestic sales volume climbed only 7%. The company also raised its quarterly dividend a penny to 6 cents.

Last May 5, before the company's remarkable autumn, the stock had bottomed out at $10.25. It had only recovered slightly when Imperial said it had received a $17-per-share offer from Schultze Asset Management, a firm specializing in troubled companies. The announcement powered Imperial's stock up more than 20%. But the parties didn't close the deal. After Hurricane Katrina hit New Orleans, Schultze dropped its offer for Imperial to $10.50 per share. With its stock trading between $13 and $14, Imperial rejected the lowball offer. Since then, Schultze has dropped its stake in Imperial from more than 14% to less than 9%, Mechler says.

It didn't seem so at the time, but in retrospect, Hurricane Katrina probably deserves an assist for Imperial's last six months. Days after the storm, refining resumed at Imperial's plant between New Orleans and Baton Rouge. Meanwhile floodwaters had crashed into the nation's largest sugar refinery, a plant operated by Domino Foods in Arabi, La., just east of New Orleans. The water spoiled millions of pounds of sugar and kept the plant closed until December.


  Imperial's management, too, seems to know that the sugar boom can't last forever. Following the quarterly performance announcement, a number of Imperial's senior executives, including Mechler, exercised some of their stock options. The company opened the window for stock options when "we [felt] that the public had the same set of fundamental information," as company insiders, Mechler says.

Indeed, management and outside shareholders alike appear to have benefited from the widely publicized sugar-price spike. But the shares may not stay at these hypoglycemic heights indefinitely. Investors may wish to take the recent surge with a grain of ... well, you know ....

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