ALCO - Alico: Value Behind Short-Term Trouble

2023-06-18 05:42:51 ET

Summary

• Alico's stock price dropped significantly due to the record breaking destruction of Hurricane Ian, which hit Florida in September 2022 and created a major fruit drop problem.
• The citrus production problems Alico is facing related to hurricane Ian are abnormally bad and not indicative of long-term problems.
• Alico's stock price should increase drastically as its 2024 harvest season numbers are reported and improvements in year-over-year citrus production begin to normalize.

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Thesis

Alico ( ALCO ) has taken a dive in its stock price and an extreme drop in revenue due mostly to short-term problems from Hurricane Ian that occurred in September of 2022. These citrus grove production problems will impact Alico's stock performance for the remainder of the 2023 harvest but will begin to show significant signs of improvement during the 2024 harvest season which begins this October. Alico's citrus production should recover substantially this fall and fully recover within 2 years.

Congress is currently working on a bipartisan federal relief block grant that should, as has been the case in the past, reimburse Alico for the majority of if not all of the lost income from the hurricane damages. When grove production normalizes and the block grant money starts to roll in, Alico's stock will start to move upward which is why I'm recommending Alico as a buy. As their earnings begin to improve, they will likely reinstate a larger dividend which was cut 90% from $0.50 to $0.05 after Hurricane Ian. This larger dividend payout will add further upward momentum to Alico's stock price.

About Alico

Alico owns 73,000 acres of land in the Charlotte, Collier, DeSoto, Glades, Hardee, Hendry, Highlands, and Polk counties of Florida with mineral rights on all of it, plus mineral rights on an additional 17,000 acres of land. 98% of its revenue comes from citrus farming on approximately 49,000 acres. The remaining property is used for ranching, land conservation, mineral rights exploitation, and other land easement opportunities that Alico can capitalize on.

Income and Cash

A Lapse in Earnings from Hurricane Irma

Over the past decade, Alico has had both a positive net income and a positive operating income every year (until recently) except for 2017 when Hurricane Irma wreaked havoc on central Florida.

In 2017, Alico's grove production had a 17.8% decrease in total fruit yield due to drought, higher than normal weather temperatures, and citrus greening which causes fruit to drop from the trees before they can be harvested. Alico had also given a statement at the end of 2017 projecting that their 2018 yield could drop an additional 40-45% due to damages done by Hurricane Irma.

Alico had at the time already been saddled with $180 million in debt and the combination of bad news sent the stock tumbling from $34.15 to $25.75. Alico was faced with further volatility after announcing a company-wide reorganization to consolidate their citrus businesses into a single entity called Alico Citrus.

Alico's 2018 season was disappointing but boxed crop production only decreased by 36% instead of the 40%-45% Alico had estimated. Alico also began receiving insurance claims of $9.4 million from damages related to Hurricane Irma. Hurricane Irma also made Alico eligible for a federal relief block grant and from 2019 to 2021 Alico had received approximately $24.5 million in federal relief.

Earnings After Irma

After a $9.5 million loss from its continued operations income in 2017, Alico regained positive operations income again in 2018 despite the 36% decrease in its citrus harvest, and in 2019, finally began to see the fruits of its company-wide reorganization program Alico 2.0. Alico began selling off unproductive assets in order to pay down its debts and streamline its operations and by 2019 had posted its biggest earnings from continued operations in the past decade at $37.5 million largely due to a record decrease in citrus greening. Earnings from continuing operations in 2020 came in at $23.7 million despite supply chain and labor problems related to Covid-19, and in 2021, Alico had another great year for its continued operations income at $34.8 million. From 2017 through 2021, Alico was able to pay off $72.4 million of its $180.2 million in long-term debt.

The Impacts of an Artic Blast and Hurricane Ian in 2022 and 2023

Just as Alico began reaching impressive new heights, its 2022 season saw some significant setbacks due to a combination of a late frost and the third most costly hurricane on U.S. record Hurricane Ian . In January of 2022, arctic winds created a cold blast that lowered the temperature of central Florida to below freezing temperatures for an extended period of time, which resulted in fruit dropping off of the trees before it could be harvested. This extended freeze event happened during the Valencia harvest and Alico was forced to accelerate the harvest of these groves to mitigate the increased rate of fruit drop. The accelerated harvest resulted in oranges that had been picked before they could mature to optimal quality standards and Alico saw a decrease in total boxed fruit production of 12.9% due to this frost event.

In September of 2022 Hurricane Ian struck Florida and damage was inflicted on all of Alico's citrus groves. While damage to its trees were minimal, the hurricane's strong winds created a major fruit drop problem for Alico. The remaining fruits left on the trees dropped earlier and therefore required Alico to speed up its harvest again, this time resulting in a 45% year-over-year decrease in boxed citrus production for the first six months of the season.

While the 2024 season of Alico's operations should increase total production year over year compared to its 2023 season, Alico's management has stated that yields from its groves may not revert to their full productive potential until the 2025 harvest season. While Alico predicted its fiscal year of 2022 income to be between $30.7 million and $33.3 million, it experienced $23 million worth of one-time losses in the form of casualty losses and inventory adjustments related to Hurricane Ian. As of March 31st 2023, Alico has had a net income loss of $11 million so far this season. $3.2 million in Q1 of 2023 and $7.8 million in Q2 of 2023.

Insurance Claims and Federal Relief for Hurricane Ian

Through April of 2023, Alico has so far received $13.7 million in crop damage insurance proceeds and $.083 million in property and casualty damage claims proceeds related to Hurricane Ian and has submitted additional crop damage claims that it is currently waiting to hear about.

In the United States House of Representatives, a bill was introduced to pass a Block Grant Assistance Act of 2023, which would delegate disaster relief funds to the citrus industry to help with damages caused by Hurricane Ian. After Hurricane Irma in September of 2017, Alico received its federal block grant in 3 parts over the course of 3 fiscal years to total $24.5 million in federal grant money. If Alico receives funds close to this amount, it would level out its current trailing 12-month average operating income loss of $24 million.

Balance Sheet

Alico's strong balance sheet is due in large part to the property the company owns. According to their 2023 Q2 balance sheet, Alico has a net property and equipment value of $369 million. On top of its citrus grove operations, Alico leases out the rest of its land for ranching or mining. If Alico deems that parcels of its land are not productive enough, it will sell them and use the proceeds to pay off its long-term debt or to shore up cash on bad harvest years.

So far this fiscal year, Alico has sold off 888 acres of non-core or underperforming pieces of land for $4.9 million and has $0.15 million in land currently up for sale. Alico estimates that they can get $4,500-$5,500 per acre of ranch land and $8,000 to $10,000 per acre of grove it holds on its balance sheet.

The equipment and property value of Alico is almost twice the value of its $187 million market cap. Proceeds from these sales have been used to pay down Alico's long-term debt from $170 million in 2018 to $109 million at the end of the fiscal year of 2022. Alico has since, due primarily to Hurricane Ian and what Alico deemed to be the heaviest frost incident in 20 years, increased its long-term debt back up to $125 million.

Stock Price

It looks highly unlikely that Alico will be profitable this year and the share price has strongly reflected this realization. Alico's stock has been falling since June of 2022 as the market began to digest the financial results of the company's struggles with the January frost. On June 6th, Alico's stock price sat at $42.92 before falling to $27.87 in October. The month of October is the beginning of the citrus harvest season in Florida and a new season's harvest helped the stock's momentum trend upward to $32.61 in November but as soon as the assessments of the damage from Hurricane Ian began to be announced in their first fiscal quarter of 2023, the stock absolutely cratered to $22.86, briefly peaked at $27.79 and has since been hovering around the $22-$23 mark.

I think that this price point is an overreaction to news that is bad but not definitive of a long-term trend and instead a result of an accumulation of unfortunate events that has rapidly decreased Alico's short-term ability to turn a profit. After Hurricane Irma and after the January frost of 2022, Alico's stock dropped sharply as the bad news began to roll in but in both cases began an upward rise in price as soon as news that Alico had been able to stabilize the situation had come out.

Currently, it is looking rather certain that Alico will lose money on its normal operations this year, and I believe that once the results of Alico's 2024 Q1 harvest drop, this alone could cause the company's stock to rebound to at least the $30.00 mark and continue up from there when the 2024 Q2 results are made available and the public can see Alico's business operations have begun an upward trend back to normal.

Selling Off Land Should Boost Stock Price Further

Alico has been steadily selling land and has in the past sold off non-productive land to raise cash, to pay off its debts, and to offset operational losses on bad years. After the frost event, Alico had $33.3 million in other net income in the first 6 months of the fiscal 2022 year vs. only $1.1 million at that time in the year prior, most of which came from land sales. Alico ended the fiscal year of 2022 with an operating income loss of $3.3 million but a net income of $12.5 million which was backed almost entirely through its land asset sales. Alico's news letters are filled with management talking eagerly about realizing the value of its unproductive land assets and I am positive that CEO John Kiernan is eager to sell off land assets further especially after Hurricane Ian. This ability to sell off land and keep Alico from taking out large amounts of long-term debt in the high interest rates of today's market should speed up Alico's financial recovery from its poor 2023 harvest and could see the stock hitting at least $30 to $35 again where the stock normally sits during profitable seasons beginning sometime during the 2024 harvest season which starts in October of 2023.

Reinstatement of Meaningful Dividend Payments and Stock Price

A reinstatement of a meaningful dividend would also likely increase Alico's stock performance. In June of 2022, Alico was paying a 4.7% annual yield dividend and had begun raising their dividend payment every year since 2020 until December of 2022. After Hurricane Ian, Alico's Dividend has slashed all the way down to a .76% ((FWD)). Once their income statements improve the upward momentum of a meaningful dividend would likely accelerate the stock's upward trajectory and reduce the time it will take for Alico's stock to hit above the $30 mark this upcoming harvest season. Anything close to another 4.7% annual yield would also boost the total value shareholders would get out of the stock and make the six months to one year wait for the stock price to recover more worthwhile.

Insider Trading

In 2022, 39 insider trades were made. 37 of these trades were buy orders totaling 42,534 shares while only 2 sell orders totaling 4,100 shares had been placed in 2022. 2023 has yet to see a share sold off by insiders but 15 buy orders were placed for 10,635 shares so far this year. The strong insider buying and concurrent lack of insider selling over the past two years is a good indication that management feels that Alico's operations will recover post Hurricane Ian and subsequently the stock price will rebound.

Citrus Greening

Citrus greening is by the far the biggest risk to Alico's business in its post Hurricane Ian future. A small invasive insect called the Asian Citrus Psyllid spreads the disease from tree to tree as it feeds on its leaves and stems. Citrus greening turns the fruit from the tree it infects green, bitter, and misshapen making it unmarketable and unprofitable.

The 2022 season saw 40 million 90 pound boxes of oranges produced. That's just 16% of what was harvested 20 years ago. In the 2004 orange season, Florida was producing 240 million boxes of oranges. Total acreage of citrus inventory in Florida has been cut in half since 1996. There is at this time no cure for citrus greening although scientists have been attempting to solve the problem since the early 2000s. Alico has chosen to solve this problem by selling off pieces of its land as they become unprofitable. Citrus farms have been steadily selling over the past 20 years as citrus greening continues to intensify and Alico is worth twice as much in land value as it is in market cap right now.

If Alico comes to see the citrus industry's future as undesirable and wants to sell off its businesses altogether, its CEO John Kiernan gets a special payout bonus to do so. Provided he stays with the company or its affiliates throughout the entire process of the change of control, John Kiernan will get a set percentage of the company's market cap depending on what the share price is at that time. If Alico's shares are selling at $36.00 a share, he'll get a $0.68 million bonus. If Alico's shares are selling at $41.00 a share, he'd get $2.6 million, $51.00 a share would bring in $3.87 million and $56.00 a share $5.3 million.

I believe that this incentivizes Alico to be sold off within the next 3 to 5 years or even sooner depending on the severity of Florida's citrus greening and the industry's inability to thus far find a cure. If John Kiernan waits until a decade into the future to sell, Alico's stock price may not warrant a very attractive bonus and by then, due to greening, the prospects of the citrus industry may look very different.

Conclusion

Despite the threat of citrus greening, I would rate Alico a buy. A combination of one-time factors over the past year have depressed Alico's price far below its normal levels. Once operating revenue starts to trend upward signaling a recovery from Hurricane Ian in combination with a chunk of federal block grant money that Alico is almost certain to receive for the hurricane damages, I think Alico's stock price will at a minimum break the $30.00 mark and probably sit between $30.00-$35.00 by the start of the harvest season in October.

Currently, as I finish this article, the stock price has jumped 7% in the past 5 days to $26.24. I would buy Alico and hold it until at least May of 2024 when Alico reports on their October through February harvest season and improvements over 2023's financial situation have been reported. Once Alico's stock price has reflected these improvements, I would make my determination as to whether I wanted to sell or hold at that time. If their 2024 harvest improves more dramatically than Alico's initial forecasts (which was the case with Hurricane Irma), then the majority of Alico's stock price recovery may be realized at that time or even over realized due to excitement over such a rapid recovery, in which case you may want to take your profits.

Reasons I Would Sell Prematurely

Foreseeable circumstances that may warrant the sale of Alico's stock before May of 2024 would really only be weather related. June through November is hurricane season in Florida and if another record-breaking hurricane came through central Florida, it would at the very least create fruit drop and hurt that year's production or in the worst-case scenario another large hurricane could create extensive storm damage to Alico's groves that would take years for the trees to recover from thus hindering their output. Due to citrus greening, it is hard to say what Florida's citrus industry will look like ten years from now, but Alico has good tangible assets far exceeding their debt levels that can be sold off and anytime the stock reaches into the $40.00 range CEO John Kiernan has a large incentive to sell per his contract's payout bonus agreement. The ability to sell assets and John's incentive to sell the company should an enticing opportunity arise leads me to believe he would sell Alico if citrus greening becomes too much of a problem in which case shareholders would rake in a hefty profit due to Alico's large ownership of land assets.

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