My only comment is that I personally think the risk associated with tropicana being aquired is potentially significant. It wouldn't be the first time a PE firm has destroyed historic B2b relationships to shave margins fractionally higher. As tropicanna accounts for most of their revenue, the future contract renewals may not be so positive as the recent.
However, if this PE was looking to enhance margins in the short-term by squeezing Alico (no pun intended), you'd expect they'd do it through largest contract, the one that got renegotiated in June. So it seems like a stretch that they start doing it from this point forward.
Also, I "drilled" the CEO extensively about Tropicana, and based to his comments, he really seems relaxed about it, unfazed. Since Alico is Tropicana's dominant supplier and they most likely have a nearly equal bargaining position. Tropicana will buy anything that Alico can sell and that has been the case for decades
I'd really like to speak with somebody from PAI partners to see their POV.
Perhaps bad news pertaining to the orange farming business is good news for the stock? It will come under more pressure to sell land for housing development, etc?
Great analysis. Lots of very valuable details. You even managed to talk to the management! I admire your persistence. In my opinion, there is one thing missing for this analysis to be perfect: a price target. What is your price target, assuming that production will recover as you predict in your base scenario (not taking into account all other possible positives such as benefits of OTC treatment, federal relief grants, tax shields, or land sales)?
Impressive and thorough work here David, thank you for sharing this quality research with readers!
I became aware of this due to the hurricane Milton hitting some of my holdings. One thing I feel is hard to know or price in is climate change and heightened chance of high class hurricanes with temperatures rising. Let's say a typical 10 year storm turns into the typical 3 year storm? We see this happening more and more in Norway with floods (fascinatingly linked with hurricane season in the U.S as we are on the atmospheric receiving end of these energy movements that storms are).
Just a little crisis maximising from me here, its obviously a part of your risk assessment but I think it's probably prudent to bake in rougher and more frequent storms hitting Florida especially.
I agree with you, the climate danger seems like a risk impossible to accurately discount. It's an obvious risk that has increased in both intensity and frequency in recent years. However, I'm glad that all acres are insured and even if I'm mistaken on citrus production rebounding in the short-term due to something like Milton, I may still yet benefit from redevelopment into RE.
I believe that another severe hurricane decimating what remains of Florida's orange industry would made John and the team finally "give up" on citrus and completely shift to residential sales.
Im not in the stock market to become a farmer. Awful business that depends why to much on externalities. Bad weather is unpredictable and it can severe implications on companies and countries.
How do you see the risk of higher labor costs for harvesting if Trump gets elected and realizes his plans on mass deportation of unregistrated immigrants?
What I think the author is missing is that John Kiernan is not incentivized to expand and grow the citrus business, he's incentivized to sell assets, and he'll be plenty rich (on top of what he's already extracted from the company) by selling off assets. A few years ago (May 2023), once the ALCO dividend was cut, Kiernan got the board to "waiver" is earlier agreement to forgo directors' fees thereby putting an extra $75K a year into his pocket. He also had a deal paying him 2% of all land sales and a related deal to get a cut of hurricane relief funds when paid (even if paid after he left the company).
Alico has been getting a lot of attention in financial circles lately. I took a quick look at it a week or two ago.
The company, and the Florida citrus industry as a whole, has been hit hard by the citrus greening that you allude to in your analysis. Its a nasty bacterial disease spread by tiny bugs called psyllids. It’s infected almost every commercial citrus tree in Florida, causing orange production to nosedive from 220 million boxes in 2004 to just 16 million in recent years.
It’s kind of like what happened to French vineyards back in the 1800s. Victorian Botanists brought American grapevines to the U.K. in the 1850s for study but accidentally introduced grape phylloxera, a tiny aphid-like pest. North American vines had built up resistance over time, but European vines weren’t so lucky. By 1872, phylloxera had wiped out 90% of Europe’s vineyards. It took decades to recover, and a lot of winemakers didn’t survive the crisis.
Back to Alico, citrus greening has been a major headache, and they’ve been trying to fight it by injecting their trees with oxytetracycline. This has helped boost yields a bit, but it hasn’t done much to improve fruit quality or stop fruit from dropping prematurely. The jury is out on how quickly the industry can recover from this situation.
If the citrus greening disease wasn't bad enough, then came the hurricanes causing substantial damage to the citrus groves. The storm resulted in a more than 50% decline in Alico's citrus harvest and the company expects it will take at least another season for its groves to fully recover.
Then there’s inflation. Rising costs for things like fertilizer, herbicides, labour, and fuel have made everything more expensive, while lower production levels mean they’re bringing in less revenue.
So the questions are whether the citrus business can bounce back and how soon it will happen. Also, there has been focus on the vast amount of land owned by the company for its citrus activities which, against the market cap of the company, looks like an undervalued asset. But this assumes that agricultural land can be repurposed for more lucrative purposes, and that Alico may be interested in divesting its land in what could only be described as a partial liquidation of the company - both are dangerous assumptions.
This is a special situation investment opportunity for sure - very speculative - lots of uncertainty.
Thanks for the comment, but uncertainty doesn’t mean something is "very speculative," particularly given the valuation, which you didn’t mention at all. I addressed all these questions thoroughly in the write-up and followed up in the subscribers' chat, so it's unclear to me why you decided to "repackage" it and comment here. Did you at least read the article?
Amazing write up!
My only comment is that I personally think the risk associated with tropicana being aquired is potentially significant. It wouldn't be the first time a PE firm has destroyed historic B2b relationships to shave margins fractionally higher. As tropicanna accounts for most of their revenue, the future contract renewals may not be so positive as the recent.
Thank you, Tom!
You are right, it wouldn't be the first time.
However, if this PE was looking to enhance margins in the short-term by squeezing Alico (no pun intended), you'd expect they'd do it through largest contract, the one that got renegotiated in June. So it seems like a stretch that they start doing it from this point forward.
Also, I "drilled" the CEO extensively about Tropicana, and based to his comments, he really seems relaxed about it, unfazed. Since Alico is Tropicana's dominant supplier and they most likely have a nearly equal bargaining position. Tropicana will buy anything that Alico can sell and that has been the case for decades
I'd really like to speak with somebody from PAI partners to see their POV.
Thank you for the comment!
Perhaps bad news pertaining to the orange farming business is good news for the stock? It will come under more pressure to sell land for housing development, etc?
Perhaps yes. Good point
This is a very thorough write up. I have owned the stock off and on over the years and you flagged things I was not aware of.
Thank you, Patrick
Great analysis. Lots of very valuable details. You even managed to talk to the management! I admire your persistence. In my opinion, there is one thing missing for this analysis to be perfect: a price target. What is your price target, assuming that production will recover as you predict in your base scenario (not taking into account all other possible positives such as benefits of OTC treatment, federal relief grants, tax shields, or land sales)?
I appreciate the kind words, Dario! Thanks.
To be honest, I don't like to think in terms of price targets so I didn't provide one
I guess I'd start reassessing risk-reward or thinking about selling between 40-50$
Great writeup.. thanks for sharing!
Thanks Brandon!
Impressive and thorough work here David, thank you for sharing this quality research with readers!
I became aware of this due to the hurricane Milton hitting some of my holdings. One thing I feel is hard to know or price in is climate change and heightened chance of high class hurricanes with temperatures rising. Let's say a typical 10 year storm turns into the typical 3 year storm? We see this happening more and more in Norway with floods (fascinatingly linked with hurricane season in the U.S as we are on the atmospheric receiving end of these energy movements that storms are).
Just a little crisis maximising from me here, its obviously a part of your risk assessment but I think it's probably prudent to bake in rougher and more frequent storms hitting Florida especially.
Thank you!
I agree with you, the climate danger seems like a risk impossible to accurately discount. It's an obvious risk that has increased in both intensity and frequency in recent years. However, I'm glad that all acres are insured and even if I'm mistaken on citrus production rebounding in the short-term due to something like Milton, I may still yet benefit from redevelopment into RE.
I believe that another severe hurricane decimating what remains of Florida's orange industry would made John and the team finally "give up" on citrus and completely shift to residential sales.
Thanks for the comment.
Im not in the stock market to become a farmer. Awful business that depends why to much on externalities. Bad weather is unpredictable and it can severe implications on companies and countries.
Thanks for this outstanding analysis and in-depth research!
Was there anything of particular interest in the Q ending 30-June-2024 from your perspective?
No, not in particular
I posted my thoughts here
https://x.com/david_katunaric/status/1820871520392298946?t=A4CskU6Z7pN7TUGq9UDvzQ&s=19
Thank you!!
How do you see the risk of higher labor costs for harvesting if Trump gets elected and realizes his plans on mass deportation of unregistrated immigrants?
Yes, it is a risk to follow, however, Alico's workforce was stable even before mass immigration started occurring in Florida and in the US
Hi
thanks for putting the work out there :)
I tried to learn a bit regarding the citrus greening... and used perplexity for that (which I find nice in the Pro setting as a starter for topics). In case you are interested: https://www.perplexity.ai/search/i-read-about-citrus-greening-b-IKZdQGJKQDiy3T66NHe39Q
Thankss
I will check it out
What I think the author is missing is that John Kiernan is not incentivized to expand and grow the citrus business, he's incentivized to sell assets, and he'll be plenty rich (on top of what he's already extracted from the company) by selling off assets. A few years ago (May 2023), once the ALCO dividend was cut, Kiernan got the board to "waiver" is earlier agreement to forgo directors' fees thereby putting an extra $75K a year into his pocket. He also had a deal paying him 2% of all land sales and a related deal to get a cut of hurricane relief funds when paid (even if paid after he left the company).
Alico has been getting a lot of attention in financial circles lately. I took a quick look at it a week or two ago.
The company, and the Florida citrus industry as a whole, has been hit hard by the citrus greening that you allude to in your analysis. Its a nasty bacterial disease spread by tiny bugs called psyllids. It’s infected almost every commercial citrus tree in Florida, causing orange production to nosedive from 220 million boxes in 2004 to just 16 million in recent years.
It’s kind of like what happened to French vineyards back in the 1800s. Victorian Botanists brought American grapevines to the U.K. in the 1850s for study but accidentally introduced grape phylloxera, a tiny aphid-like pest. North American vines had built up resistance over time, but European vines weren’t so lucky. By 1872, phylloxera had wiped out 90% of Europe’s vineyards. It took decades to recover, and a lot of winemakers didn’t survive the crisis.
Back to Alico, citrus greening has been a major headache, and they’ve been trying to fight it by injecting their trees with oxytetracycline. This has helped boost yields a bit, but it hasn’t done much to improve fruit quality or stop fruit from dropping prematurely. The jury is out on how quickly the industry can recover from this situation.
If the citrus greening disease wasn't bad enough, then came the hurricanes causing substantial damage to the citrus groves. The storm resulted in a more than 50% decline in Alico's citrus harvest and the company expects it will take at least another season for its groves to fully recover.
Then there’s inflation. Rising costs for things like fertilizer, herbicides, labour, and fuel have made everything more expensive, while lower production levels mean they’re bringing in less revenue.
So the questions are whether the citrus business can bounce back and how soon it will happen. Also, there has been focus on the vast amount of land owned by the company for its citrus activities which, against the market cap of the company, looks like an undervalued asset. But this assumes that agricultural land can be repurposed for more lucrative purposes, and that Alico may be interested in divesting its land in what could only be described as a partial liquidation of the company - both are dangerous assumptions.
This is a special situation investment opportunity for sure - very speculative - lots of uncertainty.
I welcome your views.
Thanks for the comment, but uncertainty doesn’t mean something is "very speculative," particularly given the valuation, which you didn’t mention at all. I addressed all these questions thoroughly in the write-up and followed up in the subscribers' chat, so it's unclear to me why you decided to "repackage" it and comment here. Did you at least read the article?
I'm glad you liked it, Guy. Thanks a lot!