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Cal-Maine Foods Inc (NASDAQ:CALM) is a shell egg producer, has operations in 29 states, primarily Southern, mid-western and mid-Atlantic regions in the United States. Cal-Maine engages in egg production, marketing and distribution and fully integrated from hatching chicks to egg production, manufacturing chicken feed to distributing eggs to the markets and the is the largest producer of shell eggs. Its customers include grocery chains, club stores and egg product manufacturers and Wal-Mart (NYSE:WMT) is its major customer sells 35 percent of its inventory.

Cal-Maine not only sells traditional eggs but also more lucrative low-cholesterol, cage free and organic eggs. It holds minority non-active share in Egg-Land’s Best, Inc and distributes specialty eggs under Egg-Land’s Best and Farmhouse brands. Historically, Cal-Mine integrated its business both horizontally and vertically with competitors in its supply-chain.

Egg consumption in United States is very stable at little over 250 eggs per capita and demand growth comes from natural population growth at 1 to 2 percent. However, effective marketing, awareness of low-cost protein supplement, mild economic conditions, drifting consumer behavior towards organic supplements, play major role in demand side of the shell eggs.

Feed cost is a major factor in cost side of the business. Ingredients like soybeans and corn play a significant role in the cost side. However a big decline in oil prices dampened the demand for ethanol production, which plays a major role in cost of grains. Given the economic conditions, the feed prices tend to stay lower in the near future.

Cal-Maine adopts technology in its processing and relies less on labor intensive processing. It is growing organically and by continuous acquisitions of its competitors. As of third quarter ended in February net sales are at $715 millions and total sales for 2009 may exceed $1billion dollars and net income close to $100 million little less than last year due to price sensitivity of eggs. As company selling more of its eggs year over year, last year its sale of eggs exceeded 678 million dozens represents 16 percent of US consumption. Though it is price takers market, as company gains market share economy of scale dictates pricing power.

As CEO Fred Adams and his family owns one third of common equity and their self-interests are tied to the firm and rest of the equity holders, less agency issues are foreseen, however occasional dilution of shares happened in the past.

With excellent short term solvency (consistent current ratio above 2 for long time), manageable debt and excellent cash conversion cycle at this current price range Cal-Maine looks very appealing to buy.

As long term debt is less than net working capital, and continuous dividend for past ten years, with high interest coverage and ample cash on hand this equity is trading way under its intrinsic value. With current PE of 5.5 and 2 times the tangible book Cal-Mine is a golden egg to buy. And next time you are shopping at Wal-Mart, Costco (NASDAQ:COST) or Kroger (NYSE:KR), look for customers grabbing the Eggs-Land Best eggs and suggest them cage free brown eggs are tastier than regular white shell eggs.

Past Four Quarters:

(in Million$)

Sales

950.8

COGS:

712

Gross Profit:

238.8

25%

Operating Income(EBIT)

158.3

17%

Net Income:

105.7

11%

Diluted Shares:

23.83

EPS:

4.44

Cash/Share:

3.45

Long term debt/share:

5.00

LT Debt/Equity:

0.41

Asset Turn Over:

1.71

Current Ratio

2.15

Quick Ratio:

1.28559

ROA:

19%

ROE:

36%

Assets/Equity exclude goodwill

Short Term Solvency:

2008

2007

2006

2005

2004

Current Ratio:

2.18

2.06

1.94

2.40

2.57

Quick Ratio:

1.44

1.24

1.05

1.53

1.73

Turn Over, Cash Conversion:

2008

2007

2006

2005

Receivable Turn Over:

21.28

18.60

19.30

14.78

Average Collection days:

17.16

19.62

18.91

24.70

Inventory Turn Over:

8.88

7.99

8.03

7.12

Average Processing days:

41.09

45.67

45.44

51.29

Payable Turn Over:

19.38

18.37

18.79

16.38

Payable Payment Days:

18.83

19.87

19.42

22.29

Cash Conversion Days:

39.41

45.43

44.93

53.71

Profit Margins:

2008

2007

2006

2005

2004

Gross Margin:

32.60%

19.83%

13.02%

9.43%

30.68%

EBIT Margin:

24.41%

9.73%

0.94%

-3.28%

18.57%

Profit Margin:

16.58%

6.14%

-0.21%

-2.77%

11.60%

Interest Coverage:

29.04

8.31

0.57

-2.08

13.99

2008

2007

2006

2005

2004

Free cash to Firm:

131.75

40.76

13.77

1.55

79.15

Diluted Shares:

23.73

23.6

23.5

23.83

24.34

FCFF/Share:

5.55

1.73

0.59

0.06

3.25

Accrual Ratios:

2008

2007

2006

2005

2004

Operating Assets

392.8

305.9

274.8

210.8

225.5

Operating Liabilities:

126.7

94

92.5

64.7

71.4

NOA

266.1

211.9

182.3

146.1

154.1

Aggregate Accruals:

54.2

29.6

36.2

-8

Accrual Ratio:

1.29

0.90

2.57

1.00

Disclaimer: Long on Cal-Maine and holds the stock.

Source: Cal-Maine Foods: Buy This Golden Egg