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Cal-Maine [NDQ:CALM] May 10, 2009: $24.51 closing price
52-week range: $17.01 (mar. 9, 2009) - $48.80 (Aug. 18, 2008)
Yield = variable (a stated quarterly rate of 33% of EPS)


Cal-Maine is the largest producer/marketer of shell eggs. They market both generic and value-added (free-range, low cholesterol, organic) through their 25.9% owned Egg-Land’s Best, Inc as well as through private label brands. About 37% of their revenues come from Wal-Mart and Sam’s Club.

Egg pricing peaked in 2008 resulting in an all-time record $6.40 in EPS for FY 2008 (ended May 31, 2008). Earnings predictability are low due to fluctuating feed prices for their flocks and widely variable wholesale pricing. Zacks now sees FY 2009 – 2010 estimates of $4.34 and $5.73 while Value Line takes a more conservative view at $4.00 and $4.80.

Even the lower VL projections put CALM’s multiple at < 6.2x FY 2009’s and 5.1x next fiscal year’s projections. If the numbers come in as expected the year-ahead dividend should be about $1.60 /share for a yield of 6.5% on today’s price.

Unless business seriously deteriorates, Cal-Maine shares do not seem to have a lot of downside. The absolute lows of calendar 2008 and 2009 were $20.80 and $17.01 during some of the worst panic selling in our lifetimes.

Here’s a good-looking play on Cal-Maine out to November 20th:

Buy 1000 CALM @$24.51 ……Pay .......... $24,510
Sell 10 Nov. $25 calls @$2.70 …......Collect $2,700
Sell 10 Nov. $22.50 puts @$2.80 .....Collect $2,800
Net Cash Outlay = $19,010

If Cal-Maine shares rise by 2% to $25 by Nov. 20, 2009:

The $25 calls will be exercised.
You will sell your shares for $25,000.
The $22.50 puts will expire worthless.
You will have no further option obligations.
You will end up with no shares and $25,000 cash.

That’s a $5,990 net profit (plus any dividends) on an original outlay of $19,010 = 31.5%
[achieved in under 6.5 months on shares that only needed to go up by 2% from the trade’s inception date].

What’s the risk?

If Cal-Maine shares finish Nov. 20, 2009 below $22.50:

The $25 calls will expire worthless.
The $22.50 puts will be exercised.
You will be forced to buy another 1000 shares and to lay
out an additional $22,500 cash.
You will end up with 2000 shares of CALM.

What’s the break-even on the whole trade?

On the first 1000 shares it’s their $24.51 purchase price less
The $2.70 /share call premium = $21.81 /share.

On the ‘put’ shares it’s the $22.50 strike price less
The $2.80 /share put premium = $19.70 /share.

Your net break-even is the average of
$21.81 + $19.70 / 2 = $20.76 /share.

Cal-Maine shares could fall by as much as $3.75 /share or (-15.3%)
from the starting price without causing a loss.


What if the shares stay unchanged right through expiration date?

The $25 calls and the $22.50 puts would both expire worthless.
You would still own 1000 shares worth $24,510.
You would have no further option obligations.

Your liquidation value would be $24,510 plus dividends on
the original $19,010 cash outlay.

That would be a $5,500 net profit or plus 28.9% (not counting dividends) in less than six and one-half months, on shares that did not go up.

Disclosure: Author is long CALM shares and short CALM options.

Source: 'Egg'-cellent Returns with Cal-Maine Foods