Cal-Maine Foods: Buy This Golden Egg

Cal-Maine Foods Inc (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 (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 (COST) or Kroger (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.

Comments

[firboy4:]

That last remark makes me think that you work for Cal-Maine. I've been watching and trading this stock for several years and it's P/E ratio is always very low, yet the stock still seems to fluctuate between 18 and 26. So, for me, CALM is a trade, not an investment. But one good thing about it is that if I ever get stuck holding it for a while, I know that the dividends are decent. So, I'm with you on buying this stock. I actually think I bought it on Friday afternoon after having sold it early that morning.

Due to simply looking at it's 52 week chart and having traded it many times, when I was checking it out a couple of weeks ago and noticing it was down to around 20, I just knew it was due for a rebound. Either I was just lucky or maybe looking at the 52 week chart helped. But it went up to 26. I thought it would only go up to 24 though, and then drop back down to around 22 or so. It did drop back down. That's just the nature of this stock!

Anyway, one can make a nice living just trading the fairly even ebb and flow of this stock's price, and do it in the safety of knowing dividends will continue. As you said, Mr. Adams has 1/3 of the shares, so I could assume that he wants those dividends to keep coming his way.

Along with that, the whole idea of people eating eggs is in itself a good topic for much discussion, including the influences you mentioned such as population growth, fertilizer prices, etc... But all things considered, the egg business is in my opinion a rather stable business.

If Marie Antoinette had said, "Let them eat eggs." maybe she wouldn't have lost her head. Hey, it's Saturday and I'm just having my coffee before heading out on the trails.

Jun 13 10:33 AM

[Stockmaven:]

In my opinion Calmaine is a steal at these prices. By any metric the industry has been consolidating and firms like this will be the winners.
Diividend is superior and so is the balance sheet.
Alais only one drawback is the industry is quite volatile in the short run.
Over easy or scrambled?

Jun 14 11:22 AM

[CAREFul Inv...:]

Question:

FCF seems to flucuate greatly. Will the company generate a cash build of close to $100mm this year (giving it close to $200mm next year or $8+ per share) OR will they have to replenish their hen supply this year (every two years) such that there will be no cash build in 2009/10?

What has the historical p/e muliple been for the company -- earnings seem highly cyclical.

Jun 14 06:28 PM

[swellcat:]

Short interest as a percentage of float: 20.88%. Any insight into why a fifth of the tradable shares are sold short?

Jun 14 11:02 PM

[Sreeni Meka:]

No, I do not work for Cal-Maine. And all my research is from non-material public information, mostly from SEC's edgar and other public data. I personally come up with ratio's and projections with my own calculations.

By the way, this weekend Barron's mid-year review discussed about this equity. I am long on this equity and personally I would rather invest than trading for short-term.


On Jun 13 10:33 AM firboy4 wrote:

> That last remark makes me think that you work for Cal-Maine. I've
> been watching and trading this stock for several years and it's P/E
> ratio is always very low, yet the stock still seems to fluctuate
> between 18 and 26. So, for me, CALM is a trade, not an investment.
> But one good thing about it is that if I ever get stuck holding it
> for a while, I know that the dividends are decent. So, I'm with
> you on buying this stock. I actually think I bought it on Friday
> afternoon after having sold it early that morning.
>
> Due to simply looking at it's 52 week chart and having traded it
> many times, when I was checking it out a couple of weeks ago and
> noticing it was down to around 20, I just knew it was due for a rebound.
> Either I was just lucky or maybe looking at the 52 week chart helped.
> But it went up to 26. I thought it would only go up to 24 though,
> and then drop back down to around 22 or so. It did drop back down.
> That's just the nature of this stock!
>
> Anyway, one can make a nice living just trading the fairly even ebb
> and flow of this stock's price, and do it in the safety of knowing
> dividends will continue. As you said, Mr. Adams has 1/3 of the shares,
> so I could assume that he wants those dividends to keep coming his
> way.
>
> Along with that, the whole idea of people eating eggs is in itself
> a good topic for much discussion, including the influences you mentioned
> such as population growth, fertilizer prices, etc... But all things
> considered, the egg business is in my opinion a rather stable business.
>
>
> If Marie Antoinette had said, "Let them eat eggs." maybe she wouldn't
> have lost her head. Hey, it's Saturday and I'm just having my coffee
> before heading out on the trails.

Jun 14 11:26 PM

[nyka:]

A fragmented analysis, difficult to comprehend because of faulty diction. ...simply looking at IT'S 52 week chart...Do you mean to write simply looking at IT IS 52 week chart? Differentiate between the possessive pronoun ITS (NO APOSTROPHE) and the contraction IT'S, which, again, means IT IS. Also place a hyphen between 52 and week. Two words (adjectives) mofifying a noun?? Place a hyphen between those two words... 52-week.

Jun 15 05:33 PM

[Shirley Mit...:]

I read your reply re CALM. As a senior needing income I want to try your trading technique. I'm waiting for a down turn for a good entry point. I would appreciate any info and/or advice you can offer. Thank you. Interested.


On Jun 14 11:26 PM Sreeni Meka wrote:

> No, I do not work for Cal-Maine. And all my research is from non-material
> public information, mostly from SEC's edgar and other public data.
> I personally come up with ratio's and projections with my own calculations.
>
>
> By the way, this weekend Barron's mid-year review discussed about
> this equity. I am long on this equity and personally I would rather
> invest than trading for short-term.

Jun 15 10:49 PM

[NL2:]

The spread between U.S. human population and table laying hens has widened over the last two years, resulting in extremely high egg prices. Past hot egg markets have been followed with a rush by producers to expand, bringing supply back in line with demand and often oversupply. Currently there are a number of external factors that have slowed producer’s expansion plans, which may result in a more orderly return to supply - demand balance.

The 2009 revenue and earnings quoted in the summary are very aggressive and not supported by the lower Q4 egg prices. CALM may have difficulty achieving 2010 EPS in excess of $4, considering current egg prices, hen numbers and recent hatch.

Jun 22 08:53 PM

[ari5000:]

Even assuming they make $3/share -- the stock is still worth in the mid-30s as a fair value.

It's very difficult to make a case that this stock is expensive. For some reason, CALM has always had a dedicated group of shorts/bashers. There must be some syndicate that has a strong bet for failure but I have no idea why. Just seems to be the case with some stocks.

Jun 23 08:34 AM

[Dean Z:]

Yes, this stock has had a dedicated group of short sellers but for good reasons. On the positve side, this is a well run company and the industry is slowly consolidating. On the negative side, however newcomers tend to miss the fact that egg producers have just gone through the best 5 year period ever for egg prices and profit for egg producers. Traditionally egg prices have rarely breached 1.00/dz but in 2008 we saw wholesale prices reach record levels of 1.40/dz. It took a while but producers have expanded as usual leading to a glut of eggs (I recently talked to a producer which has several trailer loads of eggs sitting with no buyer). Prices have now fallen into the .75/dz. which is below a break-even price of about .80/dz -give or take a few cents based on feeds costs. So at current prices Calmaine is losing money. If Calmaine loses money, out goes the dividend (it's based on a % of profit). In talking to people in the industry, the next year doesn't look good. It will take time to get the slupply back into balance with demand. Eventually, that will happen and Calmaine will make good money again but that could likely be a few years off. People forget that this is still a highly cyclical business which will go through booms and busts and it looks like we are entering a bust period. Full disclosure: I am short Calmaine and will remain short until I see egg prices back near $1.00/dz wholesale.

Jul 16 03:07 PM

[NL2:]

>>>>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<<<

Actual was $929 million sales and $79.5 million net income, much lower than expected by author. Considering Q3 had been reported and egg and feed prices were know at the time the blog was written, author obviously did not put a lot of work into his numbers.



On Jun 22 08:53 PM NL2 wrote:

> The spread between U.S. human population and table laying hens has
> widened over the last two years, resulting in extremely high egg
> prices. Past hot egg markets have been followed with a rush by producers
> to expand, bringing supply back in line with demand and often oversupply.
> Currently there are a number of external factors that have slowed
> producer’s expansion plans, which may result in a more orderly return
> to supply - demand balance.
>
> The 2009 revenue and earnings quoted in the summary are very aggressive
> and not supported by the lower Q4 egg prices. CALM may have difficulty
> achieving 2010 EPS in excess of $4, considering current egg prices,
> hen numbers and recent hatch.

Jul 31 07:01 PM