ALCO - Alico: Is Hurricane Ian Giving You An Opportunity?

2023-06-27 23:23:55 ET

Summary

• Hurricane Ian delivered a tremendous blow to the company and its stock.
• Near-and-long-term catalysts should emerge.
• The company’s review of its land holdings could significantly improve the value of its land holdings.
• The stock trades at a significant discount to its hard asset value.

Company Overview

Alico ( ALCO ) is one of the largest orange producers in Florida, commanding roughly 15% of the market, which is the largest in the U.S. The company's 49,000 acres of orange groves are situated throughout central Florida. About 90% of Alico's oranges make healthy not-from-concentrate orange juice, a breakfast staple for Americans. The company sells the remainder of its annual orange crop as whole oranges. In addition to its orange operations, Alico owns about 19,000 acres of undeveloped ranch land in Florida.

Investment Thesis

The orange juice business might not top your list of the best businesses, but several reasons make Alico a compelling company to own. First, the state of Florida has a conducive climate for growing oranges. Like Florida's quasi-tropical climate, oranges tree growth requires steady temperatures and consistent precipitation. Outside the US, Brazil competes with Florida in the orange market.

Fortunately for Alico, American drink a ton of OJ. So much so that US orange growers cannot produce enough for the entire US annual demand. That means Alico's presence in Florida gives them the advantage of being closer to US orange juice makers than its Brazilian counterparts. In turn, orange buyers can offer Alico a better price on their oranges because they save on the massive freight costs they would pay to ship oranges from Brazil.

Being one of the largest producers, buying from Alico allows its customers to buy from a single source, simplifying their procurement process significantly.

Alico's largest customer is Tampa-based Tropicana. Orange buyers inspect Alico and other Florida orange groves each year and bid on their annual harvest. Again, due to proximity, Tropicana can offer the best price for Alico's crop. This situation keeps Alico's sales and marketing costs very low compared to other businesses.

Since 2018, Alico has sold off about 30,000 acres of its ranch land holdings for an average price of around $4,500 - $5,500 per acre. The company used the proceeds to pay down some debt and return the capital to shareholders by bumping its dividend from $.24 per share in 2019 to $2.00 in 2021 and buying back some shares. Over the last several years, these moves by Alico's management team have done wonders for the company.

Why does this opportunity exist?

Rising interest rates and, ultimately, Hurricane Ian, brought an end to the party. As interest rates increased throughout 2022 and into 2023, Alico's ranch land sales slowed to a trickle. At the same time, Hurricane Ian had a devastating effect on the company's 2023 harvest.

Fearing the worst, Alico cut its annual dividend in December 2022 from $2.00 per share to $.20. The news wasn't received well by shareholders, and investors sold the stock hand over fist.

Not surprisingly, Alico's business is very much a seasonal one. The company typically collects cash from its harvest during its second fiscal quarter. In the corresponding 2023 quarter, the company reported what seemed to be the worst-case scenario. Alico informed investors that sales had dropped 57% to $21 million, and adjusted EBITDA fell to ($7.8) million in what should've been their best quarter of the year.

CEO John Kiernan commented:

Alico, along with the Florida Citrus industry, has experienced significant reductions in revenue due to having less fruit available for sale as a result of the impacts of Hurricane Ian. The April 11, 2023 USDA Citrus Crop Forecast estimates a 61% decline in the Florida Orange box production, as compared to the prior year.

The earnings release did reveal some positive news, however. Also, an overlooked SEC filing may have shed some light on what could be a significant shift in the company's focus.

Catalysts

• The second quarter report also reported that Alico had received $13.7 million in crop insurance through April 30th. The insurance proceeds that Alico's already collected should cover overhead and interest expenses for a while. It also said that the company has additional claims outstanding and is working with its insurers to determine the remaining amount of ensure proceeds it is entitled to.
• Alico also believes it can get additional funding from the Consolidated Appropriations Act passed in December. The legislation provides the Small Business Administration $858 million for its Disaster Loan Program and $5 billion for FEMA's Disaster Relief Fund. Both designate funds for Hurricane Ian. Any additional government assistance or insurance proceeds can be used to fund working capital until the next harvest and possibly to pay down debt if proceeds come in strong enough. Considering the company's current situation, that would be a wonderful (and perhaps generous) shot in the arm.
• In 2022, Alico tested part of its crop with Oxytetracycline (OTC). OTC is a therapy developed to resolve Citrus Greening, a plant disease that has hampered citrus yield for several years. Kiernan had this to say in the company's last quarter report:

In 2022, we began testing a new application of the Citrus Greening therapy Oxytetracycline ("OTC"), which is used in citrus and other crops. After a review of the new application method by the U.S. Environmental Protection Agency, the Florida Department of Agriculture and Consumer Services granted a special local-need registration on October 28, 2022. We began treating our trees on January 16, 2023, as the product and application devices became available, and treated approximately ten percent of our trees as of March 31, 2023. The extent of any benefit of the OTC application will not be measurable until the completion of the fiscal year 2024 harvest. Although not a cure for citrus greening, this OTC application mitigates some of the impacts of citrus greening and has shown to decrease the rate of fruit drop and improve fruit quality.

• The therapy could help Alico's crop return to normal levels quicker and improve crop yield in the long run. Alico's contracts are based on 'pound solids' or the amount of juice their oranges produce. Improvements in yield can have a meaningful effect on the revenue Alico records for each harvest.
• Interestingly, Alico issued an 8-K in mid-June that may signal the company's long-term plans. Mr. Kiernan's compensation plan was amended to include a 1% Long Term Real Estate Bonus on the sale of Alico's citrus groves. Based on Alico's internal valuation, the bonus could be worth up to ~$5 million to the CEO. The bonus terminates on September 30, 2024.
• Perhaps most compelling, Kiernan said in Alico's most recent quarterly earnings call that the company has been working with land use planning professionals for quite some time and that they expect the work will be completed later in the year.

The comment could mean a host of alternative uses of company land holdings. Combined with the amendments to Kiernan's compensation agreement, the company's long-term focus could change to a higher-return strategy than orange groves and undeveloped land sales.

Time will tell if these changes in the CEO's compensation structure will affect the business, but the board-created incentives may be telegraphing the company's plans to some extent. Until then, the magnitude of the bonuses will be a powerful motivator.

Risks

• Alico will struggle to make money until the orange groves start producing enough cash to cover and exceed its fixed costs. In the meantime, they've already received insurance proceeds, with potentially more on the way. Federal relief could also be on the way. Kiernan notes that it may take up to two full seasons to recover to pre-hurricane production levels.
• More weather-related incidents. Just because Hurricane Ian hit Florida last year doesn't mean another one isn't lurking around the corner. Ian hit Alico's citrus groves hard. If another hurricane visits Florida, it could be a glancing blow like storms before or deliver a devastating blow to the company.
• Over the last couple of quarters, Alico has drawn on its two revolvers to fund its operations. At the end of the second quarter, the company had ~$102 million in long-term debt and ~$21 million on its lines of credit (up from $5 million a year prior). The already-received insurance proceeds will help provide some liquidity until cash collection from this year's harvest, but they'll likely need additional cash to get there. Alico's lines of credit have about $74 million available to the company. Federal relief or additional insurance proceeds may be on the way too.

Valuation

About a year ago, Alico put out an investor presentation showing the value of its real estate holdings.

It has sold some of its ranch acreage since then. It now holds about 19,000 acres. Considering the rising interest rate environment and slowing demand for development, I value the remaining land at the low end of the average estimate, or $85.5 million.

Though the citrus groves are not currently in the best condition, they're a long-term cash-producing holding. But we'll be conservative and account for the 49,000 citrus acres at the low end of its per acre value, $392 million.

Alico has held all of its land for many decades. So, if we assume 50% of the entire estate is taxable, the land could fetch $358 million after a 25% tax rate is paid. At the end of last quarter, company debt stood at $124 million. This implies a net value of the land holdings at $294 million. Based on ~7.6 million shares (consistent over time), the land holdings are worth about $39 per share. The $25 per share market price at the time of this writing implies a 55% upside.

The taxable amount could come down if a deal for the entire company or the citrus operation is structured other than an asset sale. A 1031 exchange is also on the table. I'll admit I'm not a tax expert, but further upside from tax planning could exist.

On top of the value of Alico's current land holdings, the company's strategic review of its land use could result in a higher value of the assets. Given its vast holdings, Alico's options are just as enormous.

For instance, its citrus groves are worth about twice the value of the ranch land on a per-acre basis. So, the ranch land could be used to command significantly more than the $4,500-$5,000 it's currently worth. In one scenario, the company could sell all or a part of its 49,000 citrus acres, deploy the cash to develop all or part of its 19,000 ranch acres and realize additional value.

How the review process shakes out is anyone's guess at this point, but Alico's land use review could be announced in the next few months.

Actionable Conclusion

Alico is going through quite an ordeal currently. I think this is a nice business run by a competent management team that is compensated to provide shareholders with long-term catalysts potentially. If catalysts do not materialize, a recovery of Alico's orange business and continued ranch land sales will offer multi-year tailwinds to the stock. Value investors should be encouraged by today's margin of safety.

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