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Cal-Maine Foods, Inc: Valuation

Aug. 18, 2015 10:48 AM ETCALM
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Hello, and welcome to my first article here on Seeking Alpha.

(For the good stuff, please skip to: Valuation and Results)

Today/Tonight I will be presenting a recent valuation I conducted of CALM by examining the firm's levered cash flows. There are many talented and insightful people here on S.A. who have written about what the company does, the current state of their operations, their strengths, their weaknesses, and current issues facing the industry, so I will be focused purely on valuation.

Word of Caution:

If you have not completed prior research on this company, do not start here. In order for any valuation to be meaningful, it must be put into context so that you can determine its usefulness. After all, my ideas/inputs could vary greatly from yours.

The Assumptions:

  • Examination of the cash flows to equity stakeholders is prudent because the company is funded primarily by shareholders (almost 93% currently), and debt levels are not likely to rise significantly above the current debt-to-capital ratio of 7% or the five-year average (12%).
  • Growth is a product of return on equity and earnings retention.
  • Dividends are assumed to be fixed at a 30% payout ratio. In reality, there is a variable rate dividend policy, though the most recent payout ratio and the five-year average have been around 30%
  • Capital expenditures and depreciation will grow with earnings
  • Non-cash working capital will grow with earnings
  • Free cash flows will be subject to a stable capital structure
  • The firm will grow in perpetuity of 3%, roughly long-term GDP growth, (if you prefer the more pessimistic 2.8%, it reduces the end value/share by $2.)
  • Capital expenditures will be roughly 50% greater than depreciation in perpetuity, reflecting some of the recently seen expenditures required to fuel this firms growth and maintain operations
  • A rate of 9.59% will be used to discount cash flows; calculated by using a risk free rate of 2.2%, a levered beta of 1.28 reflecting the firm's capitalization, and a forward-looking equity risk premium of 5.5%

The Valuation:

The Results

According to the model, CALM is estimated to be worth roughly $62.00/share vs $52.17/share (current price then), representing around a 16% upside. The firm is expected to grow 17%, 12%, and 8% for years 1,2, and 3 respectively.

Is this accurate? To put this in context, the firm's 5 year historic growth in net income is 18% and the analyst consensus is that CALM will grow on average 33% per year, though next year the firm will face contraction.

Source:finance.yahoo.com/q/ae

Short-Comings

  • As we have seen with epidemics in recent times, egg prices are highly volatile. This valuation is not a top-down valuation reflecting future price volatility (I do not have the informational resources). Rather, it is a reflection of firm's ability to generate cash based on business operations.
  • Capital structure is subject to change
  • Dividends are paid out variably, not fixed
  • Market rates and measures fluctuate constantly

And that brings things to a close. I am sure this article came across a as bit dry and abrupt, but I intended it to be less of an article and more of a tool to aid your equity research. I hope you found it helpful.

Disclaimer: This article was intended for informational purposes only and should not be interpreted in any way as a buy, sell, or hold recommendation.

Analyst's Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CALM over the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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