Does Cal-Maine Foods Fit in My Portfolio?

 

So I decided to skip the obvious egg puns that I could have used in the title. I just didn’t have it in me. So what’s this about eggs? Cal-Main Foods (NASDAQ: CALM) is the largest producer of shell eggs in the United States. They have somewhere around 23% of the U.S. egg market, and are located mainly in the southeast.

So the first thing you might notice about this company is that it isn’t very sexy. I’d say that it’s downright boring. They don’t produce the latest silicon chips, or promise day-trips to the Moon, or even (to my knowledge) create entertaining YouTube videos. They produce eggs, lots and lots of eggs. They are a fully integrated egg producer. They own feed mills, hatcheries, processing and packing plants, distribution centers, pullet growing facilities, breeder flocks… etc. Soup to nuts, if it’s involved in producing eggs, this company has it, and for the most part OWNS it. I like that. Very little of their production is contracted out, only 4% according to their website. Still not too interesting?

So what’s been happening in the sleepy little egg industry lately? How about the government mandated slaughter of tens of millions (of chickens) to stop the spread of a disease threatening to wipe out entire populations (of chickens)? This happened a little over a year ago and sent wholesale prices of eggs soaring! How’s that for interesting? It may not be the latest episode of The Walking Dead, but it got my attention. Cal-Maine chickens were unaffected by the Avian flu, so guess who had a steady supply of fresh eggs to sell into the demand? Record profits! This more or less sent the stock from the mid $30’s to over $60 about a year ago.

Big deal, right? That was in the past, how does this help me now? Well, the laying population has recovered. The supply/demand imbalance has tipped the other way. Egg prices are near 10 year lows. GASP! When they reported Q4 results this July, they LOST a penny a share. Not bad considering they were expected to lose 19 cents a share. Yesterday, the 26th of September, they reported a loss of 64 cents a share, totally missing the expected loss of 33 cents. Revenues were down 60% from the same period last year. The share price hit a low of $40, which seems to be a strong level of support. But if it breaks below the support, there could be a major selloff. Expectations for near-term earnings are not good due to the low egg price environment. You know what happens to companies with shrinking earnings? Look out below… or so I’m hoping.

Cal-Maine Foods has a variable dividend policy. Basically it pays dividends only after profitable quarters, at a rate of one third of the income. Their dividend is all over the place, but it’s almost always THERE. But of course there is now a two quarter gap in dividends. But I think there’s something here.

Eggs are a cheap source of protein. For that and a zillion other reasons I won’t go into, it seems pretty obvious to me that demand for eggs isn’t a thing of the past. They industry isn’t going anywhere. I think Cal-Maine Foods is simply going to get bigger and bigger. They have a history of acquiring smaller egg companies. In one of their investor presentations, in a slide titled ‘ACQUISITION OPPORTUNITIES’, they list about 60 competitors by name. (How ballsy is that?) In fact, on August 2nd they announced their intent to acquire Foodonics International, Inc. and its entities doing business as Dixie Egg Company. The timing seems good, and Cal-Main’s balance sheet is great. It would only take about half of their cash and short term investments to pay off all of their liabilities. Why not buy up some smaller competitors while egg prices are low and the industry is at a discount?

Let’s talk specialty eggs. Nutritionally enhanced eggs! Organic Eggs! Cage Free Eggs! Anything ‘organic’ is hot, but look at the cage free egg phenomenon. Here’s a
Motley Fool article about all the companies that are demanding cage free eggs, and how CALM can benefit from it. Specialty eggs represents between a quarter to half of revenue for Cal-Main Foods, (depending on regular egg prices it seems) and the business is pivotal in the company’s growth strategy. Specialty eggs are less subject to price declines in the current environment, and tend to have higher margins.

So what eggxactly is the plan here? (sorry, I had to put one in somewhere). I’m going to take a wait and see approach to this. That seems to be a common theme for me. I’m hoping continued weakness in egg prices, the lack of a dividend for a few quarters, and some good old fashion general market weakness bring this down a considerable bit. Will it happen? Who knows, but I’m thinking that about $32 might be a good place to start a position. If I’m feeling brave I could start buying around $36.50. I could see myself holding this long term if things work out in my favor. Egg based dividends spend as well as silicon ones.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada

One comment on “Does Cal-Maine Foods Fit in My Portfolio?

  1. Tyler Hunt says:

    Very interesting article about Cal-Main, even if it isn’t an eye opener technology wise! Hope everything is going well. In case you haven’t been following up, recently I transitioned my blog into a website! Come check it out, and I would love to get your professional feedback: http://www.grittyambition.com

    Tyler

    Like

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