Cal-Maine Foods: Eggs in One Basket

Even though the best days of the agriculture boom may be behind us, I have found a related play that I think still has some upside. It is Cal-Maine Foods, Inc. (CALM) which, given the volatility of this market, sounds good immediately.

Cal-Maine is in the egg business in a big way. In fact, they are the largest producers of eggs in the United States, with over 15% of the total annual egg consumption. That's a lot of chickens and when the chickens come home to roost at Cal- Maine there are 23 million of them! Last year they lay 685 million dozen eggs. That's a lot of chicken power!

Cal-Maine operates in 29 states and has been steadily adding to its production by acquiring smaller players. Since 1989, they have bought 10 companies but since the industry is quite fragmented and the company still wants to grow there are lots of targets available to them.

Things have been good in the egg business and, as a result, the company has adopted a new and unusual dividend policy. Effective with the third quarter of fiscal 2008, which ended on March 1, Cal-Maine will pay a variable dividend for each profitable quarter. The payment will be an amount equal to one-third of the quarterly profit. The first of these variable dividends was paid on April 28 and amounted to 80.7c per share.

The good side of this policy is that it gives shareholders a clearly-defined stake in the company's bottom line. The downside is that the dividends, and hence the yield, are unpredictable.

In 2007, for example, the company reported net income of $36.7 million ($1.66 a share) for the whole year. Based on the new formula, that would have produced a total dividend of 55c a share for the year. That's less than the April 28 payout. In 2006, Cal-Maine posted a net loss, so no dividend would have been paid.

Based on previous experience, the third and fourth quarters are the strongest ones for the company, so we can expect another good dividend in July. The company lost money in the first quarter of fiscal 2007 (the September-November period) and made a small profit in the second quarter.

But there are many factors at work here. For starters, the price of eggs has been very volatile and the company's bottom line will be directly affected by movements up or down. Then there are public attitudes to consider. Some of you will recall the period when eggs were considered bad for you and a lot of people stopped eating them, which needless to say wasn't great for the egg producers. That concern seems to have gone away and now health officials are telling us that eggs are a good source of low fat protein. Also, the rising cost of grain, especially corn, has a direct impact on Cal- Maine's profits.

On the plus side, egg prices have been high because supply has been constrained and demand has been steady so profits have held up very well. The company's first quarter was excellent with its EPS tripling from 74c to $2.41 a share on 59% higher sales.

The bottom line is that while this new dividend policy will likely mean more cash flow to investors, the quarterly amounts will vary and there may be no dividends at certain times of the year. So when you see projections of a 10%+ yield, take them with a grain of salt. They're based on a single quarter under the new system.

The shares closed mid-week at $33.91. That's about six times trailing 12-month earnings, which should provide a cushion if egg prices drop. This stock carries above-average risk but it's paying out well and it's off almost $7 from its 52-week high.

Action now: Buy with a target of $38.

Disclosure: Author has a long position in CALM

Comments

[hungryneck:]

What is going on with the short interest on this puppy?

2008 Jun 02 12:57 PM

[Gaucho:]

CALM has 126.24% FLOATED SHARES SHORTED------ THE SEC IS USELESS

Outstanding shares 21 million
54.83% of those shares are in the Float or 11,514,300
moneycentral.msn.com/o......

Shortsqueeze.com has 14,535,600 short

14,535,600/11,514,300 = 126.24%

I.E. Heavy naked shorting/fake shares

That is the only thing that has kept this stock 25 dollars below where it should be trading

2008 Jun 02 03:44 PM

[James Cullen:]

This would be much better if you provided some forward (or even recent, such as from this quarter) talk about egg prices.

2008 Jun 02 05:10 PM

[Ex15:26:]

I'm in the camp of the other posters. I think this is a great intro to a company we've seen and heard a bunch about, mainly the short interest.
Clearly, there are 3 things that must receive more attention and deeper analysis to even begin looking into this -
1) Pricing action - is the whole world short this thing, why, and what catalyst will cause that short interest to go away.
2) Feed costs - you mention it, but what details regarding their feed costs and their ability to either hedge this or inability to plan for this can make for good or lousey future performance.
3) Finally, since they are the #1 producer of eggs how do they drive pricing with their purchasers. Do they have pricing power? What have been egg prices and where do we see them going.

Like I said, good intro, I just wouldn't put a dime into it without knowing this info. Also, I've seen a lot of really smart investors use the dividend as a reason to buy and sit in a loser with the justification that hey "I'm getting a dividend". At the end of the day, all you get is a loser with a dividend - ask BAC investors.
By the way, the yield gets better as you continue to get crushed!

Thanks for the info, I appreciate it and will put it on my list of homework assignments.

2008 Jun 02 11:15 PM

[misterchan:]

I buy a lot of eggs. As grocery price levels have increased, especially during the last year, the price of eggs has surpassed almost everything else. There are also many more "designer eggs" and some sell for as much as 5 or 6 dollars a dozen. The most economical way to buy them is to wait for a supermarket to offer them as a "leader". Also, CALM ships lots of eggs overseas, fresh and powdered. Regarding dividends, try them, you'll like them. I incorporate the use of both covered and naked calls when needed. As for CALM, I have already traded it very profitably and also got that fat dividend. At present, I am holding some shares with June 35 calls written. If they take it, I will have a respectable profit and if not, I will probably write some more. I also have written some Nov. 45 naked calls which are quite profitable now, but I'm not in a hurry to buy them back. Also wrote just a few far out 30 naked puts which are not profitable, but if I let them get exercised, I will be getting the stock at a bargain price. However, I do agree with you that you can be left with a weak stock. I have a couple of those, too. But what's perfect? Certainly not the stock market.

2008 Jun 03 12:53 AM

[User 80605:]

I see a few positive things. Think of cal-maine as poor man's steak. As more money is taken out of people's budgets to pay for higher gas prices, people will most likely substitue eggs for meat. This is normal behavior. Also, I have read some where that the reason management has taken 30% payout of earnings as dividends is to scare short sellers that have been keeping the share price suppressed. Like someone said, you really need a catalyst for short sqeeze.


Now the negative: The variable payout strategy has not been working so far as it seems more folks believe higher feed prices will eventually hit cal-maine's margins and its stock.

Disclosure: I am long CALM with average price of 33.24 (including covered call proceeds)

2008 Jun 03 02:38 PM

[User 80605:]

Also, Technically, teh chart does not look good. If it hits 29, then it could go to $27.5 soon and potentially $25-$26 area.

2008 Jun 03 02:44 PM

[charliebrown:]

I'm just putting a little in it, not to be too heavy, then I wait until the shorts get out either by a price drop and covering or by getting squeezed if the price goes up. If you're diversified you can wait until this silly 100%+ short dies out and make up to 50-100% profit.
With the food price going up and calm's profit margin and PE and P/S I don't care what the shorts are dreaming about.

2008 Jun 03 03:50 PM

[broxton street:]

Westwood Asset Management
One of the main theories that we are operating off of is the demand inelasticity and the surge in commercial food demand over the last 10 years combined with a leveling off and return in growth for table egg consumption from individuals; also the normal population increases. So this has coincided with a reduction in producers and a slight reduction in birds. So basic economic; means higher prices.
I wouldn't worry about the huge short interest. We've seen this before and it doesn't really mean much.
However CALM's short interest surpasses anything that we have seen be before especially in a high dividend paying equity. This leaves the market open to abnormal rapid increases due to pannicy short covering combined with momentum buyers. If I was going to short CALm on fundamentals I would not due to this interest. Markets are a little like boats..everyone piles on one side and something unexpected happens in order for the market to reach equilibrium.
another price driver from econ 101 is the increase in inputs corn and soy meal. CALM buys from the spot market and every 20 cents in bushel of corn is 1 cent in cost per dozen, eevery 20 $ per ton of soymeal also = 1 cents. so for 4th Q we are expecting 39 cent area per dozen cost..
calm doesn't seem to have pricing power. the sales prices for their customers are derived from Urner Barrys weekly quotes.

So overall we are long due to the small PE and think there could be a short covering crisis

2008 Jun 08 02:18 PM

[rockymtnway:]

I recently got out of CALM at about the same price I got in. The reason? I started tracking the price of eggs at my local supermarket. Not very scientific, but when the local price for a dozen large eggs has gone from $1.83 on 5/12/08 to 10 dozen for $10 ($1/dozen) 6/18/08, it was clear the trend was way to strong and in the absolute wrong direction. I expect next quarter's profits to be a big disappointment given the expectations and the following quarter to be dismal. Once it tanks and drops back into the $6-7 range that it's historically had before 2007, I'll get back in. I believe in the fundimentals of the company, just not the bubble it's sitting on right now.

2008 Jun 19 10:16 AM

[BW334:]

you have to be short or haven't gone close to a grocery store, they now control egg market in the Southeast. oh, if they were a $1 a dozen it was a loss leader.( 2.19 today at Wal-mart)

2008 Jun 27 05:31 PM