Cal-Maine Foods: Ready to Cook

| About: Cal-Maine Foods, (CALM)
Cal-Maine Foods (NASDAQ:CALM) is the largest egg producer and distributor in the US. It sells 685 million dozen eggs a year and holds a 15% market share, with a flock of 30 million birds including the 2 million recently acquired through the purchase of Zephyr Egg along with additional flock from the purchase of Cargill's egg operations.

In the quarter ending June 2008, the company reported a profit increase of 99% to $1.54 per share. Revenues for the quarter were up 39 % to $235.6 million while full-year earnings came in at $151.9 million, or $6.41 per share on sales of $916 million.

Feed costs are up 30% mainly due to the rise in corn prices; however, Cal-Maine kept its margins fat by passing on the increased costs to the consumers by raising egg prices by 40% since last year.

Moreover, CALM has been able to expand its margins further by selling specialty eggs, including organic, cage-free, vegetarian and low-cholestrol eggs, which contribute over 15% of their business. These are higher margin products and growing at 15-20% annually.

The company also pays out a hefty dividend as part of their plan to pay 33% of their earnings to share-holders. The stock currently yields over 5%, yet it trades at a Price to Sales ratio of 1 and a P/E of 6. Short interest in this stock runs extremely high at over 90%, so any move up might be exaggerated by short covering.

Critics argue that a fresh supply of eggs will hit the market in the next few months, driving down the prices. However, USDA estimates that the current US flock of chickens is 2% below last year's levels. Some analysts even argue that egg prices might rise to $2 per dozen over the next few months.

With commodities in a short-term downtrend, Cal-Maine will probably keep growing its margins by keeping prices high even as feed costs decline. Moreover, egg is still a better and cheaper protein source than meats and is a highly inelastic product.

Technically, the stock is very close to breaking out to an all-time high. In fact, the stock made an all-time intra-day high yesterday before pulling back. One strong rally on high volume is all that stands between the stock and an explosive move to the upside. Granted the stock has almost tripled from this time last year, but solid earnings, cheap valuation, strong demand for eggs and a high short-interest make for a great bull recipe.

Full Disclosure: I own CALM but my position can change anytime without notice. Also, I did think of using the words "egg-plosive" and "egg-agerated" but thought I'd spare you.

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