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Imperial Sugar: A Sweet Spot in a Sour Economy

This time last week shares of Imperial Sugar (IPSU) moved against the grain of the general market due to a rumor circulating that it may be a takeover target.

While the company has neither confirmed nor denied the rumor, there are numerous factors that suggest that the shares of one of the largest refiners and marketers of sugar in NAFTA may be significantly undervalued relative to the company's sizable asset value and that near-term catalysts could materially improve earnings.

Foremost, the USDA is set to review its tariff rate quota by April 1, a move that could result in an increase in the amount of cheaper world sugar cane allowed into the country to alleviate a historically wide spread between U.S. and world prices.

As a sugar refiner, IPSU's margins are impacted by the difference between the price it receives by selling its refined sugar to customers and what it pays for raw sugar cane. While world prices have collapsed from multidecade highs in February, U.S. prices have remained stubbornly elevated as the market remains tight.

Mexico, a free trade sugar partner, is also suffering from a tight domestic sugar market and may not help alleviate price pressure.

Longer-term trends in the sugar industry may also benefit IPSU's earnings prospects. For example, the use of high fructose corn syrup, a sugar alternative used to sweeten sodas and packaged foods, may be losing favor as consumers desire more natural ingredients.

Most recently, ConAgra, (CAG - Get Report) Pepsico (PEP - Get Report) and Kraft (KFT) have all indicated that they will be replacing HFCS with natural sugar ingredients in certain products.

Additionally, organic sugar products appear to be gaining growing acceptance by customers. IPSU's 50% owned Wholesome Sweeteners joint venture is growing at a rate well above the overall sugar market.

According to recently disclosed figures in the company's 10-Q filing, sales and net income increased 31% and 159% year over year. The Wholesome Sweeteners business could contribute in excess of $100 million in annual sales to IPSU and be worth more than $50 million. IPSU has the option to purchase the remaining 50% of the business later this year, a move that would likely be accretive to earnings and shareholder value depending on structuring.
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CAG $41.83 2.25%
GIS $56.62 1.13%
K $67.41 1.77%
HSY $94.31 2.46%
PEP $94.16 0.33%


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