Michael Melby of Gate City Capital Management presented his investment thesis on Alico, Inc. (US: ALCO) at Best Ideas 2024.

Thesis summary:

Alico owns and operates nearly 49,000 acres of land in Florida that are utilized for citrus farming. Most of the company’s citrus production is devoted to oranges used to make not-from-concentrate orange juice. Alico also owns 5,099 acres of ranch land, 526 acres of land devoted to aggregates mining, and 90,000 acres of mineral rights.

In September 2022, Hurricane Ian struck Florida and decimated the orange crop, causing the share price of Alico to collapse. Although the hurricane resulted in a short-term setback, Mike believes the value of the land was not impaired.

Citrus farmland economics in Florida has been hampered in recent years by the bacterial disease known as citrus greening. Potential treatments for citrus greening are being applied and early results suggest that Alico could see a substantial increase in citrus yields.

Alico recently completed an analysis to identify properties that have a potential higher and better use. As a result of the analysis, Alico will proceed with an entitlement process for the 4,500-acre Corkscrew Grove outside of Fort Myers, which could be worth a substantial portion of the company’s recent enterprise value. Mike expects the company to pursue additional development opportunities as well.

Management is incentivized to increase shareholder value. The CEO’s bonus plan is tied to Alico’s share price, with additional awards if the company is sold.

At the recent share price of $29, Alico has a market capitalization of ~$220 million. Following the company’s recent sale of 17,600 acres of low-quality ranchland for ~$78 million, Alico has $50 million in net debt and an enterprise value of ~$270 million, or under $5,000 per acre. Mike utilizes a discounted cash flow analysis to derive his price target of $44 per share, or 50+% upside.

The company’s clean balance sheet and large portfolio of owned real estate provide investors with a significant margin of safety.

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About the instructor:

Michael Melby is the founder and portfolio manager of Gate City Capital Management, a micro-cap value focused investment firm. Before starting Gate City Capital, Michael worked as a research analyst at Crystal Rock Capital Management where he covered the consumer, restaurant, retail, and gaming sectors. Michael previously worked at Deutsche Bank Securities in their Debt Capital Markets group and at the University of Notre Dame Investment Office where he focused on natural resources, fixed income, and risk management. Michael earned an MBA from the University of Chicago Booth School of Business where he graduated with Honors and a BBA in Finance from the University of Notre Dame where he graduated Summa Cum Laude. Michael is a CFA Charterholder and has earned the Financial Risk Manager designation.