No egg on Cal-Maine's face
Posted Dec 30th 2007 11:10AM by Zack Miller
Filed under: Earnings reports, Wal-Mart (WMT), Commodities, Agriculture
Back in my hedge fund days, we did a TON of work on U.S. egg prices. This was back in 2003-2004 in the throes of the Atkins craze. Pasta companies, companies with a lot of exposure to grain, and anything anti-Atkins was taking a hit. Even the great, Weight Watchers (NYSE: WTW), with just a great business model and brand, was getting whacked. It looked like Atkins, and its seemingly lethal blend of high fat and high protein, was going to stay.
We decided to play this trend by purchasing Cal-Maine Foods (NYSE: CALM), a huge distributor of eggs to the likes of Wal-Mart (NYSE: WMT) and other huge grocery outfits. Based in Jackson, Mississippi, and run by an effervescent CEO, Fred Adams, Cal-Maine rode record egg prices those couple of years. In 2003 alone, the stock was up almost 1000%.
What Mr. Adams told us then was that although Atkins was helping to increase demand for eggs, the egg itself was making a comeback. Once shunned as solely a cholesterol-delivery device, the egg is back in fashion and recognized for its overall health benefits.
The problem? The egg industry is subject to supply and demand like any other commodity. Historically, given relatively fixed input costs (feed for the birds), the egg industry was only profitable every few years when egg prices spike. Cal-Maine, being the 800-pound gorilla, assured us that demand was outstripping supply and, although feed costs were going up, they weren't going up as quickly as egg prices themselves.
Fast forward a couple of years and Cal-Maine is back in the news. See the Wall Street Journal article (subscription required) from last week. For the quarter ended December 1, Cal-Maine reported net income of $40.2 million, or $1.69 a share, versus $6.4 million, or 27 cents a share, a year ago.
Revenues also rose -- 62% to $223.7 million -- while gross margins nearly doubled to 34% from 18.1%. The ebullient Fred Adams said of his firm's earnings, "These results reflect the favorable market conditions, with egg prices reaching record levels during the quarter. All of our operations performed well during the period."
The WSJ reports that Cal-Maine noted, "demand for fresh eggs was strong for both the retail and food service markets, as well as demand for eggs used for liquid, frozen, and dried egg products. The export markets also have been very strong this year, said Adams, and the company expects Europe, the United Kingdom, Japan, and the Middle East to be good markets for eggs in 2008."
Investors looking at this stock need to do their own math as to where feed costs and egg prices are going over the next year, but one thing's for sure, this stock, having doubled this past year, has no egg on its face.
Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund. The author holds no position in stocks mentioned.
Tags: ag, agriculture, cal-maine, calm, commodity, earnings, egg, egg distributors, egg industry, egg prices, Fred Adams, walmart, wmt |
