May 28, 2010
Written By Chloe Lutts Jensen
This small-cap company specializes in one thing: eggs. Believe it or not, this quiet little company has stacks and stacks of hens clucking away, pushing out little piles of gold along with every egg they lay. In 2009, those hens produced 778 million dozen (that’s 9.3 billion) eggs, or about 18% of the country’s consumed yellow-eyes, making them the largest player in the space. Cal-Maine Foods, Inc. (CALM, Nasdaq) takes those eggs, grades them, packages them, markets and distributes them in 29 states. If you happen to pick up a dozen and the package says, “Egg-Land’s Best,” “Farmhouse,” or “4-Grain,” then you are enjoying a Cal-Maine egg. Everyday shoppers at Wal-Mart (NYSE: WMT) and Sam’s Club account for 36% of sales. The company also jumped aboard the organic bandwagon–19% of sales came from nutritionally enhanced, cage free and organic eggs.
Consumer demand may wax and wane with the overall economy, but American consumers love their eggs–demand increases about 1% a year, so the egg market isn’t as fickle as others. Competition in this market is highly fragmented, but Cal-Maine’s operations have allowed it to make 16 strategic acquisitions during the past twenty years.
Anytime a company is involved with both animals and food, there are risks. In Cal-Maine’s case, the biggest risks are tied with the commodities market, and that should not be taken lightly. Two-thirds of the company’s expenses are tied to feed costs. Corn and soybean meal are the essential feed ingredients for all those hens, and feed prices can be wildly unpredictable, sensitive as they are to weather, competitive needs for renewable energy projects, and supply-demand concerns. …
There is also an interesting situation concerning management at Cal-Maine. Based on the voting share structure of the company, Fred Adams (Chairman and CEO) effectively controls 54% of the company. The President and COO owns another 14%. Between them, they can basically dictate whatever happens with the company. This should be viewed as a benefit and, possibly, a potential risk to investors. The benefit is that, historically, they have made good choices as to how to run the business and it is reflected in the financials and stock price (up more than 700% since going public in 1996). The risk is that if their plans go awry, shareholders are basically powerless to effect any change.
Speaking of financials, earnings have been hit during the recession. Fiscal 2009 earnings came in at $3.34 a share, and are estimated to be $2.72 a share for this year. Next year, they are expected to pop back up to $3.24 per share. Nobody likes to invest in a company whose earnings are declining, but in this case, the company has $60 million in net cash and is due to receive another $33 million from a litigation settlement with a securities firm. The company is on sound financial footing–it is both profitable and cash-solid.
With the company now trading at a less than 12 times earnings, and expected to see +20% growth next year, it may be a great time to find gold inside this henhouse.