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Strategies & Market Trends : Value Investing

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From: E_K_S	10/17/2004 1:21:35 PM
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Has anybody noticed how low commodity grain prices are (specifically soybeans and corn)? I was looking at the long term trend of corn as this is the biggest input cost for CGlA the chicken producer. I was shocked to realize that recent corn prices are at multi year lows: Monthly rates - cbot.com!&year=&period=M&varminutes=&study=&study0=&study1=&study2=&study3=&bartype=BAR&bardensity=LOW Weekly rates - cbot.com!&year=&period=W&varminutes=&study=&study0=&study1=&study2=&study3=&bartype=BAR&bardensity=MEDIUM Here is Cagla's Income statement by quarter: (notice cost of revenue correlates to the price of corn) finance.yahoo.com The other major expense at Cagle's was their interest expense as their business is capital intensive. Since, they recently sold one of their plants in Georgia, they are not as leveraged as in the past. They are now financing all of their capital needs from current cash flow. From their 10K report:"...Interest expense for the thirteen weeks ended July 3, 2004 decreased by $1,077 or 61% over the same period of a year ago. This is reflective of decreased borrowings and lower interest rates than a year ago...". Therefore looking forward, they should benefit from their paydown of debit and financing operations through their current cash flow. This will help earnings increase too. From past history, Cagle's can generate incredible earnings (as much as $3.50/share) when grain prices trend near their lows. Cagle's does not hedge their future grain requirements but buys their feed on the spot market. Last quarter they reported a profit of $1.30 per share (http://biz.yahoo.com/prnews/040802/clm061_1.html). One more good quarter and they are generating a forward PE of 4-5 at the current $12/share. I think this stock could trade again in the $20's like it did in 1995 through 2000. The last insider trades were buys between $13.00-$13.50 in late August’04 and early Sept’04.. The Cagle family already owns (or controls) about 62% of the outstanding shares, so they have a vested interest in managing a profitable operation. You must be careful as the stock is thinly traded and it is a very small capitalized stock with a market cap of under $60 million. I may buy a very small position with the expectation that the company posts two or three quarters of positive growing earnings based on the very low grain prices. I have a target price of $20. I think this is a low risk trade at current levels. It is not a trading stock because of the very low daily volume. EKS

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