Alico, Inc. $ALCO

My Investment Checklist

*** Disclosure: I’m long the stock, so what you’re about to read is incredibly biased***

1.      Is the company undervalued?

EV/EBITDA: 21.48 (Adjusted TTM EBITDA)

EV/Sales: 3.23

Price/Book: 0.74

$ALCO is trading at its cheapest valuation ever relative to assets and are actively looking to sell off some of their real estate.  With that said the operating business is currently a dumpster fire.  A winter freeze in January and Hurricane Ian have resulted in a material pullback in the business.  Furthermore management is unsure whether they will be able to recoup any of their loses thru insurance.  Moreover $ALCO recently cut their dividend by 90% which doesn’t exactly signal financial strength.  Nevertheless the orange industry isn’t going anywhere and there will no doubt be better yielding years ahead.  Investors could benefit by buying while there’s still uncertainty, which makes this an idea worth looking into.  

2.      Can I easily explain what the company does?

Yes, the primarily sell citrus fruit.  Alico has two division Alico Citrus (~97.5% of sales) and Land Management and other operations (~2.5% of sales)

3.      Does the cash flow statement line up with income statement?

No, net income has been much higher than cash from operations:

Some of this discrepancy is coming from a change in working capital, however the majority of which is due to the sale of real estate assets.  This is inflating reported income, as asset sales/purchases are not accounted as an operating line item. 

              Regarding capital allocation $ALCO spend most of their cash on debt repayment, capital expenditures, and dividends paid out.  Given the current circumstances management would probably have preferred to pay out less in dividends.  Although it’s difficult to forecast hurricanes so I don’t have any issues with these decisions.

4.      Is the Balance Sheet Healthy?

Total Cash: $865K

Total Debt: $111.6M

Current Ratio: 1.91

$ALCO has next to no cash in their piggy bank and a sizeable amount of debt.  However net interest payment in the last 12 months only totaled $3.3M and $ALCO has been actively paying down debt.  Moreover analysts are projecting ~$8M in EBIT next year, which gives them ~2.5X net interest coverage on a bad year of earnings.  That’s still an uncomfortable level of leverage, but $ALCO is actively selling off real estate assets so the operating business could lose money and they’d still be in good shape.    

5.      How profitable is the business?

Gross Margins: (30.1)%

Operating Margins: (262.9)%

Net Margins: (20044.6)%

Alico’s operating metrics are super whacky due to the aforementioned issues.  Here’s a look at what they’ve done historically:

$ALCO is unsurprisingly not a good business and in fact super cyclical:

Nonetheless patient buy and hold investors will likely see around a 12% EBIT margin on average over the next decade.  Unfortunately I have no clue what profitability will look like near term.  With that said sales have averaged $113M annually over the last ten years.  This implies normalized operating earnings of ~13.5M if we apply a 12% EBIT margin on revenues.  However that’s still not great, especially for a business that goes thru massive peaks and troughs.

6.      What is the company’s growth potential?

10-yr Revenue CAGR: (1.52)%

10-yr Operating Profit CAGR: (5.25)%

The start and end dates used here were 2012-2021 as 2022 was a bizarre year.  Nevertheless negative growth is no doubt suboptimal.  Although 2012 was a relatively good year, which makes this data set look worse than it probably is.  In fact I would have a hard time believing that $ALCO won’t be able to grow at a modest rate over time.  The company has been buying additional acres and planting more trees since 2018, so this will likely flow thru the income statement once mother nature becomes accommodating. 

Additionally inflation alone should result in the commodity price going up over time.  Nonetheless I wouldn’t pencil out any higher than low single digit growth long term.  

7.      Is management rewarding shareholders?

$ALCO recently cut their dividend by 90% down to $0.05/share.  Furthermore the company hasn’t historically bought back many shares.  Although management made an interesting comment in the most recent press release;

“...As the Company recovers from the effects of the recent hurricane, future capital allocation decisions will be evaluated in an effort to maximize returns to shareholders, which may include but are not limited to pursuing opportunities to acquire additional citrus acreage at attractive prices, repurchasing common shares, making other acquisitions, or even considering special dividends as asset sales, such as additional portions of the Alico Ranch, are realized.”

This is perhaps me over psychoanalyzing management, but I found it interesting that they mentioned buybacks prior to dividends.  Personally I believe buybacks would be a better use of capital as $ALCO is trading well under liquidation value.  It’ll be interesting to see how they decide to allocate capital moving forward, but the mere fact that management is thinking critically about this is bullish in my opinion. 

              While the core business may not spit out any FCF in the near term, $ALCO is almost certainly going to continue liquidating their land assets.  In the last 3 years $ALCO has averaged north of $37M in real estate sales.  I would conservatively estimate that 50% of this is returned back to shareholders, which would imply an over 10% net shareholder yield.  This of course can’t go on forever, but $ALCO is marketing over 27% of their total land for sale.  In short, these asset sales should persist for the foreseeable future. 

8.      How does the company stack up against their peers?

I couldn’t find another publicly traded citrus grower, so for that reason I’m skipping this question.

9.      What’s the counter argument?

The counter argument is that we don’t really know the true fair market value for Alico’s real estate assets and that their operating business will continue to suffer for longer than expected.

              $ALCO had to delay the filing of their 10-K, due to an error in the calculation of deferred tax revenues from 2015-2019.  $ALCO stated that this actually caused retained earnings to increase by ~$2.5M.  However what we don’t know is the present market value of their real estate assets.  There’s a good chance some land will need to be marked down due Hurricane damage and an overall pullback in the real estate market.  In my opinion I don’t think there will be a drastic change as acreage land is less volatile compared to urban real estate.   Additionally even if there was significant hurricane damage, $ALCO would likely receive compensation from either insurance or government relief.

              Regarding the operating business I have literally no idea, but would argue that this is unknowable and a waste of mental energy.   

10.  Is there something I think the market may be missing?

Yes, $ALCO trading below book value is a massive head scratcher.  This isn’t a barely profitable newspaper company in terminal decline.  Moreover there’s an excellent chance that book value is materially understating the value of those assets:

Granted this data is a bit dated, but even taking the lowest estimate, $ALCO’s equity is trading at $0.46 on the $1 if you believe they can sell their assets for $505M.  Furthermore $ALCO is actively selling off their real estate and paying down debt/returning capital back to shareholders.  It’s not like these assets are sitting dormient and sucking up company funds.  Management has very clearly articulated their strategy, but Mr. Market is not listening for whatever reason.

Final Thoughts:

              $ALCO is a super interesting name given the situation they’re in and potential change in management’s capital allocation.  I have a hard time believing that the stock can get much cheaper from here, given the value of their assets.  Conversely if $ALCO got back to the low end of fair market value ($505M), that would imply a ~119% upside.  Even if it took 3 years for Mr. Market to re-rate the stock, investors would receive at ~29.5% CAGR.  This also assumes zero FCF from the operating business, which is a ridiculously bearish assumption.  In summation $ALCO smacks me across the face as a no-brainer.  It’s also uncorrelated from any other stock I own in my PA, so for that reason I recently started a position.  Finally, I’m in no way suggesting that readers buy $ALCO and as always I encourage you to do your own due diligence.  

***Disclosure: The author is long the stock as of the time of this publishing.  This article is intended for educational purposes only and in no way should be interpreted as investment advice.