Marol

Cal-Maine Foods: Higher Prices Lead to Higher Profits

Actually, I see I have already mostly said this on my post on Apr. 14. But while I'm not an expert and you're probably right long term, from what I've read in the articles cited on Marketwatch (at CALM), they've got a ferocious penalty for shorts. Also, rules for cage space for chickens have changed, and much more room is now needed, so production won't ramp up for awhile. Egg prices up far more than 1/3 in the past year. (Worrisome. One of the cheapest proteins generally available, including in the US. People need to eat.)


On Jul 06 10:27 AM matthew hanson wrote:

> This stock is destined to fall back down to Earth. I peg fair value
> at $10-$12. Egg prices move 8% on a 1% reduction in supply, and
> move 22% on a 2% reduction in supply. The fundamental demand drivers
> here are nonexistent: egg demand moves upward with population growth
> in the US, really 1% per year. Organic/cage-free/natu... eggs are
> still a tiny portion of the overall egg market. Europe and Japan
> are seeking small amounts of imports due to the cost of grain overseas,
> but now that corn and soy have moderated somewhat we will see the
> exports trail off. The long-term average USDA Grade A Large egg
> price has been wildly volatile from year to year. Look at CALM's
> stock price on the Atkins run-up in 2003-2004, then look at what
> happened to egg prices when the chicken farmers oversupplied just
> by a modest few percent--the price went down 35% in a matter of months,
> leading CALM to go from a huge profit in 2004 to bleeding losses
> in 2005 and 2006. This is a very low-margin commodity company that
> is trading at 3x book value right now. Unlike oil, which has a very
> fixed supply and huge capex needs, chickens and eggs are "renewed"
> in a matter of months, and the economics at these egg and corn prices
> will make a lot of farmers jump back in to the market, thus pushing
> supply way up and prices down. Model this as a perpetuity using
> long-term average egg prices and attendant margins and you'll be
> shocked at how investors can be valuing this stock at more than $10-$12.
> Respectfully submitted by Matthew Hanson of Twin Cedars Investments,
> LLC