Cal-Maine Foods Inc. (CALM) is primarily engaged in the production, grading, packing and sale of fresh shell eggs. It is the largest producer and marketer of shell eggs in the U.S. In 2012, it sold approximately 884.3 million dozen shell eggs, which represented approximately 19% of domestic shell egg consumption.
CALM is trading at 2.1x P/B, a 10% premium over its five-year average P/B of 1.9x. In terms of earnings-based multiples, CALM trades at 6.9x 12 months trailing EV/EBITDA and 10.7x P/E, respectively. CALM has achieved a five-year book value per share CAGR of 24.8% and a five-yer average ROE of 21.1%.
Financial And Business Risks
CALM is in a net cash financial position with a gross debt-to-equity ratio of 15%.
CALM operates in a cyclical industry with total demand that is generally steady and a product that is price-inelastic. Small increases in production or small decreases in demand can have a large adverse effect on shell egg prices. In general, a 1% increase or decrease in industry supply will translate into a 7% corresponding change in shell egg prices.
Despite a market that has been characterized by increasing consolidation, the shell egg production industry remains highly fragmented. According to Egg Industry Magazine, there are currently 52 producers who each own at least 1 million layers and the 10 largest producers own approximately 49% of total industry layers.
Feed cost represents the largest element of CALM's farm egg production cost, ranging from 62% to 67% of total farm production cost in the last five years. Although feed ingredients, primarily corn and soybean meal, are available from a number of sources, prices for ingredients can fluctuate and can be affected by weather and by various supply and demand factors. Feed prices for 2012 were 19% higher than the previous year, because of drought conditions in the major crop growing areas. Higher feed costs may encourage shell egg producers to reduce production, possibly resulting in higher egg prices. On the other hand, low feed costs can encourage industry overproduction, possibly resulting in lower egg prices.
CALM sells its shell eggs to a diverse group of customers, including national and local grocery store chains, club stores, foodservice distributors, and egg product manufacturers. Its top ten customers accounted for 66.3% of net sales dollars in 2012, with two affiliated customers, Wal-Mart Stores and Sam’s Club accounting for 31.3% of net sales dollars in 2012.
Business Quality and Capital Allocation
CALM is also one of the largest producers and marketers of value-added specialty shell eggs in the United States. Specialty shell eggs include nutritionally enhanced, cage free and organic eggs and are a rapidly growing segment of the market. Retail prices for specialty eggs are less cyclical than non-specialty shell egg prices and are generally higher due to consumer willingness to pay for the increased benefits from those products. In 2012, specialty shell eggs represented approximately 24% of its shell egg dollar and accounted for approximately 16% of its total shell egg dozen volumes.
CALM is a low cost producer with fully-integrated operations located in 16 states and it is focused on automation throughout the supply chain. At its facilities, it hatches chicks, grows and maintains flocks of pullets, layers, and breeders, manufactures feed, and produces, processes, and distributes shell eggs. Company-owned facilities accounted for approximately 92% of its egg production in 2012, with the balance attributable to contract producers. Most of its farms have modern in-line facilities that mechanically gather, grade and package the eggs produced. The increased use of in-line facilities has generated significant cost savings as compared to the cost of eggs produced from non-in-line facilities.
CALM is also a leader in industry consolidation. Since 1989, it has completed 16 acquisitions ranging in size from 600,000 layers to 7.5 million layers. On Oct. 30, 2012, CALM announced that it has reached an agreement to acquire the commercial egg operations of Maxim Production Co. Inc. The assets to be purchased by Cal-Maine Foods include a feed mill and two production complexes with capacity for approximately 3.5 million laying hens with related pullet capacity, all located near Boling, Texas. CALM thinks that the trend of the industry concentrating into fewer but stronger hands should help lessen the extreme cyclicality of the past.
CALM has a 33% dividend payout ratio and a dividend yield of 3.1%. In November 2007, the company’s board of directors approved the adoption of a variable dividend policy to replace the company’s fixed dividend policy. Commencing with the third quarter of fiscal year 2008, CALM began to pay a dividend to shareholders on a quarterly basis in an amount equal to one-third of quarterly net income.
The controlling shareholders, the Adams family, collectively possess 67.4% of the total voting power represented by the outstanding shares of CALM's Common Stock and Class A Common Stock. The Adams family intends to retain ownership of a sufficient amount of Common Stock and Class A Common Stock to assure its continued ownership of over 50% of the combined voting power of its outstanding shares of capital stock. Such ownership will discourage takeovers. Also, based on Mr. Adams’ beneficial ownership of our outstanding capital stock, CALM is a “controlled company,” as defined in Rule 5615(c)(1) of the Nasdaq’s listing standards. Accordingly, CALM is exempt from certain requirements of Nasdaq’s corporate governance listing standards, including the requirement to maintain a majority of independent directors on our board of directors and the requirements regarding the determination of compensation of executive officers and the nomination of directors by independent directors.
Current valuations are not compelling for a cyclical stock with profitability beyond its control.
The author does not have a position in any of the stocks mentioned.