Cal-Maine Foods: Which is Better - the Chicken or the Egg?

This should be the time to buy chicken and egg producers.  After all, we're in a slow down, maybe recession.  And what serves best at times like these? The food stocks.  People have to eat.  Steady profits.

Unfortunately, it doesn't work like that.  The poultry business is in a shambles in part because of high feed prices (by far their largest cost item) and overpaying for acquisitions that now look feeble at best.  They all have terrible balance sheets, short on income and high on debt.

However, one small, under the radar egg producer, Cal-Maine Foods (CALM) beats them hands down.  It's been growing via small but effective acquisitions.  The egg business has been fragmented into small private outfits.  CALM has been gobbling them up at extremely good prices and gaining market share. 

Compare how effective CALM has been compared to the poultry producers.  CALM, after multiple acquisitions, has only $13 million in "Goodwill";  Pilgrim's Pride (PPC), after going "hog" wild buying Gold Kist, dialed up its debt to $1.52 billion and added $500 million in "Goodwill".  In other words, PPC overpaid, CALM did not. 

The disciplined CALM has used its multiple buyouts to propel its earnings from zero dollars in 2006 to $152 million in 2008.  PPC lost $210 million over the last 9 months and was forced to add a secondary offering of 12% to keep going. Now PPC looks on the verge of collapse. CALM has a nice strategy of adding on these small egg producers gradually and effectively.thriving when soybeans and corn were at an all time high (imagine what the company will do now that corn is coming down).

CALM, in contrast to the others, makes money.  They have an operating margin of 22%!   What food company has similar margins? PPC, Tyson Foods (TSN), and Sanderson Farms (SAFM) have negative operating margins.  Every chicken they sell is a loss.  CALM has been rolling in dough, thriving when soybeans and corn were at an all time high (imagine what the company will do now that corn is coming down).

In addition, CALM has a healthy dividend, currently 6.5% (dividends will float, according to quarterly earnings) plus a PE of 5.  What is most remarkable about this stock is that no major analyst follows this one.  When it is"finally" discovered, it should gain strength. 

Word of caution:  this stock is heavily shorted to the tune of 84% of the float.  I think the sound fundamentals, high growth in the face of feed costs that killed the poultry producers, high divi strategy will all drive out the shorts.  This is a rapidly growing company that has come out of no where and is a breath of fresh air among a cohort of stumbling chicken producers.

Clearly when asked which should come first in your portfolio, the chicken or the egg, the answer is easy. This excellent egg producer should replace the poultry producers in any sound position.

Disclosure: Author holds a long position in CALM, a short position in PPC, and no positions in TSN, SAFM

Comments

[John C. Lee:]

Makes for a niiice short squeeze.

2008 Sep 12 05:14 AM

[TRB:]

Just one more reason why short selling is killing the market.

2008 Sep 12 08:09 AM

[GoldDiggerAB:]

"People have to eat."

You are right but you have to remember that people could eat DIFFERENT.
Why feed the chicken with grains when we could eat the grains (made to bread) as well?
I don`t want to abstain from chicken or egg but I think if you really have to look what you buy, and in couling economy there will be many families who will have to look, you might to have abstain from high class food.

Regards

2008 Sep 12 09:22 AM

[Augustus:]

1.1 lb. of feed results in 1 lb of chicken.
Eggs are not quite the same, but sill pretty efficient conversion of feed.
Eggs are so darned convenient and easy to prepare that they will continue to be incorporated into the meals. The more people do decide to cook at home, the greater the demand for eggs, even at higher prices. All JMO. of course.

2008 Sep 12 10:53 AM

[Urbane Gori...:]

Me purchase of PDA just kicked in (Perdigao SA) a South American meat product company.. And I'm looking at HOGS (Zhonping Inc) a Chinese meat producer (mainly pork) ... Seems to me that local feed costs in these countries coupled by their respective growing markets would be a better option than the US market.... jegan ;-)

2008 Sep 12 03:07 PM

[tank33:]

aren't there eggs in bread?

2008 Sep 15 10:35 PM

[GoldDiggerAB:]

Nice gains today!
No, normally bread is made without eggs.

2008 Sep 17 12:39 PM

[GoldDiggerAB:]

No, normally bread is made without eggs.
Nice short squeenze because SEC stiffens short-selling rules.

2008 Sep 17 12:49 PM