Hi JMako -
In my AG plays, I try to stay away from a one product company. These are the type of companies where you can have huge price swings because of the cyclical nature of the input "feed" costs and the limited end product pricing power. I am not sure if their 20% price increase for eggs will stick but at some price point sales will diminish significantly.
Therefore, I like companies that have their operations spread across many geographic regions and across several different products (both animal and grain).
You can probably make an argument for certain niche products and/or markets where end user prices are somewhat flexible (ie fish and shrimp farms). However, we have seen many of the specialty salmon farms lose significant of their market value due to falling salmon price and one large supplier trying to buy market share at the expense of very low margins.
I used to watch the small egg producer Cagle's, Inc. Common Stock(AMEX: CGL-A )and bought the stock when feed prices peeked. The bet is that the company usually was trading at their low and once feed prices began to fall, their profits increased. At today's price the company is selling at 62% of BV. Is this a value Buy especially with the amount of money they are losing? Maybe.
finance.yahoo.com
Notice how the company peeked in price around Dec-Jan 2010 at $10.00/share. In their quarterly period ending 10/2010, the company posted $0.66/share earnings. If you look at the historical corn price ( futures.tradingcharts.com ) it more than doubled in price from that period and the stock subsequently lost over 60% of it's value.
So if you want to speculate, buy the stock when you think corn prices have peeked and if the price of corn falls significantly, usually the stock price will move higher in about 60 days.
Therefore, assuming no significant change in their capital asset expenditures and the price of eggs remain stable, the value opportunity is in the input cost of the feed. When the feed cost is low (below $375), you could make a value argument to own the company at a PE of 10 or less.
The better play is to buy the company when feed costs are very high (w/ the stock near it's 52wk low) and then sell it to a value investor as feed cost drop and the company is reporting good earning and selling at a 10 PE.
EKS |
