Cal-Maine Foods: Ready to Cook 9 comments
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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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This article has 9 comments:
"Cal-Maine kept its margins fat by passing on the increased costs to the consumers by raising egg prices by 40% since last year."
Not true. Cal-Maine has no control over egg prices. They cannot pass along increased cost. They cannot raise or lower egg prices. Supply & demand determines prices.
"The company also pays out a hefty dividend"
The dividend is only "hefty" if earnings are "hefty". No earnings, no dividends.
"Critics argue that a fresh supply of eggs will hit the market in the next few months, driving down the prices."
What critics? A fresh supply of eggs hits the market every day. If you are talking about an increase of supply due to the increase in pullets then say so.
"Some analysts even argue that egg prices might rise to $2 per dozen over the next few months."
What analysts? There are no analysts covering the company and no analyst has generated any research. Also, if eggs "might" rise to $2 they just "might" as well fall to $.50! You fail to mention that Cal-Maine does not give forward guidance due to the volatility of egg prices. If CALM can't project prices how could an analyst?
"Cal-Maine will probably keep growing its margins by keeping prices high even as feed costs decline."
Again, they don't set prices. And if the company generally regards high feed costs as a good thing (reduces supply) then lower feed prices would mean the opposite.
"Moreover, egg is still a better and cheaper protein source than meats and is a highly inelastic product."
Again, lots of hype but nothing to back it up. Show some proof of the nutritional value and back up your claim of a "highly inelastic product". I would think gas is a highly inelastic product but demand is down in the U.S.
Your long bias was evident throughout the fluffy story.
You are right in that there are no analysts which is actually even better because it doesn't have a wide network of coverage yet. I meant to say fund managers and hedge fund operators who own the stock.
Eggs have 6g of protein. A dozen eggs will therefore have 84g of protein and costs $2. To get the same kind of protein from a chicken breast, fish or steak, you will spend $5-$15 depending on what you buy. Not sure if your question was a sarcastic one.
Actually gas is a lot more elastic than one might think but thats a separate argument. People don't buy cars at a 20% premium just to look good, yet Prius is one of the best selling cars these days. Surely you are not comparing food with transportation. If you have ten dollars in your pocket, would you drive somewhere or feed yourself first?
How do i find information about short interest in a given stock???