Wednesday, May 25, 2016

Cal-Maine Foods: my research notes



This is my research note for Cal-Maine Foods (CALM). Let’s start from the beginning.


What is a Cal-Maine Foods?

“Cal-Maine Foods, Inc. produces, grades, packages, markets, and distributes shell eggs. It offers specialty shell eggs, such as nutritionally enhanced, cage free, organic, and brown eggs under the Egg-Land’s Best, Land O’ Lake, Farmhouse, and 4-Grain brand names, as well as under private labels. The company sells its products to various customers, including national and regional grocery store chains, club stores, foodservice distributors, and egg product consumers primarily in the southeastern, southwestern, mid-western, and mid-Atlantic regions of the United States. Cal-Maine Foods, Inc. was founded in 1969 and is based in Jackson, Mississippi.”


Here is my potential and risk assessment of CALM with a quick analysis.


Potential
Risk
-Cage free
-eggs are cyclical and volatile
-Hormone Free
-”peak eggs”
-Organic
-diseases like avian flu
-Healthier (lower cholesterol)
-”egg correction”
-More nutritional
-feed cost
-Conventional eggs, Grade A, Large, etc
-⅓ dividend policy
-Only penetrated half of the country
-supply and demand
-Range free
-geographic concentration (south)
-low to no debt
-people move from corporate to local


Potential

Even the average person know the trend of foods; especially, eggs. We demand that our eggs are cage free, hormone free, range free, organic, more nutritious, and healthier and in some cases even lower cholesterol. Commitments by major corporations like McDonald's and Walmart promising to sell only cage eggs solidifies future food trends.

This is where CALM makes it money. CALM offers the traditional egg carton of grade A, large, brown, white, etc. On top of the traditional offering, CALM provides healthier eggs like egg-land’s best which have lower cholesterol than the average egg. In the future I see eggs providing more protein, calcium, vitamin C, or any other nutrition you expect. On top of that CALM has no caged eggs and some are even “ranged free” meaning they’re outside a warehouse for the larger part of the day.

Oh, did I mention CALM has little debt and is only sold in half of the country? It still has 25 states of conquer.


Risk

There is an old joke. “If you can sell it it’s probably a commodity.” Eggs are no different from aluminum or iron. In a sense you can treat CALM’s volatility like Alcoa (AA). In CALM’s own words


In the early fall of 2004, the demand trend related to the popular diets faded dramatically and prices fell. During the time of increased demand, the egg industry had geared up to produce more eggs, resulting in an oversupply of eggs. Since 2006, supplies appear to be more closely balanced with demand and egg prices again reached record levels during 2007 and 2008. Egg prices had  subsequently retreated from those levels due to increases in industry supply before reaching new highs in 2014.  In 2015, egg prices rose again due in part to a decrease in supply caused by the avian influenza outbreak in the upper Midwestern United States beginning in April 2015.  There can be no assurance that shell egg prices will remain at or near current levels and that the supply of and demand for shell eggs will remain balanced in the future.”


CALM’s profit rise and fall coincide with the price of eggs. Some of its weaknesses is food trends and what I like to call “peak eggs.” I remember in the early 2000s when eggs became a hot source of contention. Like grain people were told to stop eating it due to high cholesterol and calories. I theorize that like oil, eggs will hit a “peak egg” price and then come tumbling down.    

Last year avian flu wiped out the midwest’s egg producers which allowed CALM, with a majority of its egg factories in the South, to dominate the market. This is a double edge sword, if the next avian outbreak occurs in the South, then CALM’s profit would take the brunt of the damages.


If you would like to know more about egg prices please check out the USDA Egg Market news. https://www.ams.usda.gov/market-news/egg-market-news-reports


Of course there is always the cost of up keeping chickens like feed, soybean, corn, etc. And there has been an interesting trend in my neck of the woods. I live in the midwest and it’s not uncommon to buy eggs directly from small local farmers. It might be strange in New York or California. But I think this is a minimal risk as small farmers can’t keep up with 350+ millions demands.

I should mention one more risk is their dividend policy. Since 2015, CALM uses a one-third (⅓) net income payout policy. Meaning for that quarter one-third of their profits will be paid to shareholders. This means CALM’s dividend fluctuates constantly. I will demonstrate below.   

Revenue and Net Income

Revenue have been increasing in the past decade after holding steady since 2008-2010. But as you can see, the price of eggs and feed make net income fluctuate. Even if the company makes more money it can still lose revenue.


Margins


Ever since becoming negative in 2006 and hitting its high in 2008, CALM has been moving up and down in the margin scale. Again this is due to the price of eggs and feed. In my opinion CALM is like oil but more volatile.


EPS payout ratio

As you can see EPS fluctuates up and down but the payout ratio and dividends are low.


FCF payout ratio


Same as EPS payout ratio. In 2013 it actually paid out more of its free cash flow.


⅓ Earnings rule


To show the ⅓ earnings rule, here is the last four quarters from CALM. As you can see the dividend fluctuates but the payout ratio stays the same.


Fair Value

To be honest I can’t tell give a fair value for CALM. In pure P/E, it’s one of the cheapest on the market. But like CAT, BBL, or any other cyclical stocks, it normally is cheap until earnings drop.


Yahoo one-year target: $46.60


Thompson Reuters
high -  $59.00
Mean- $46.60
Low-   $39.00


DA Davidson : $45.00


My personal belief: CALM would be great to buy during a correction or when the egg market crashes. Technical are negative and market sentiments are negative. Might be a good deal in the 30s...or a giant value trap. I rather buy during a market correction or egg crash.  


Conclusion:

If you have a brave heart, love booms and bust consumer staple cyclical(?), and don’t care about a fluctuating dividend; go for it. For everyone else eat some egg-land’s best.


As for me I’m looking at it with intrigue. If the feds pop the bubble and CALM crashes, I might be a buyer in the 20s. With a cyclical consumer staple like this I want a HUGE cushion.

This is just my opinion blah blah blah. You know the rules.

2 comments:

  1. Thanks for the article. I have been eating eggland eggs forever. Now, I know its a brand of CALM. Gotta love the name especially if the market tanks. I cant say much about the company but eggs are very popular in the US. Demand is pretty high - sure you have risks with the avian flu etc. anyway, thanks for sharing.
    D4s

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    1. hey D4s, i'm with you. I originally wanted to know who own all the egg companies. I thought it was some food company like UL but then I got into the egg market and how complex it was. To think our daily breakfast are so complicated

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