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CAL-MAINE FOODS, INC.  (CALM)

Last Updated: Jul 4, 2008


Business Summary

Largest producer and marketer of shell eggs in the US (15.5% of total US consumption). Operating in 29 states, primarily across the southeast, southwest, midwest, and mid-Atlantic region. Cal-Maine holds the largest market share in the grocery segment, and markets to virtually all the major players. Also one of the largest makers of specialty eggs (cholesterol free, cage free, organic) - a rapidly growing segment representing about 15% of sales. Specialty egg brands are Egg-Land's Best and Farmhouse. Exclusive rights to Egg Land's Best in major metropolitan regions. Company is almost totally vertically implemented - they do everything from producing feed and raising chicks to packaging, distributing, and marketing the egg products.

Growth Strategy

Cal-Maine has been a consolidator in what is still a highly fragmented market (13 acquisitions since 1989), and plan to continue to take advantage of situations to consolidate. The point of these acquisitions are both to expand market share in existing markets, and to extend geographic reach. Eggs are not a growth market - about 1% growth per year, so the company has to gain market share or expand geographically to grow revenues. Company has and will continue to implement facility improvements to improve efficiency. Focused also on expanding specialty eggs, as they sell at higher prices and are less volatile.

Competitive Position

Cal-Maine is the largest egg company in the US, by far. This is a hugely fragmented industry, with over 60 competitors producing a meaningful volume. Cal-Maine looks to be a consolidator as it shrinks into fewer but stronger hands (which should also help to reduce price volatility and inefficient production volumes). Size, diversification, and financial means give it a meaningful advantage over the multitude of competition.

Risks

Cal-Maine is essentially a commodity company, and their profitability is directly influenced by wholesale egg prices. These have been rather high over the last couple of years, so that's something to consider (although the stock price reflects expectations of wholesale price drops). Feed prices are a primary cost component, and rises in corn and soybean meal affect profitability - although the company notes that historically, low feed prices led to overproduction of eggs and they are more profitable when feed prices are high. The growth strategy is acquisition based, which can always be risky. Customer concentration is high, with Wal-Mart/Sam's Club accounting for 37% of 2007 sales, and the top 10 customers accounting for 67% of sales.

Management

Fred Adams is CEO and Chairman, and he owns 36% of the common and 90% of the super-voting (10 votes) stock. Governance is somewhat questionable, as Adams is in complete control of the company - there will be no takeover or buyout without his approval. His son-in-law, Adolphus Baker, is President, CEO, and Director, and he owns the remaining super-voting shares. Adams is also the founder of the company in 1969 - he's 75 years old. Baker appears to be the heir apparent, he's 50 and with the company since 1986, a director since 1991. Compensation is reasonable, and the company grants few options.

Financial Health

Financial health is OK. The company has a net cash deficit, with about 88 million in cash vs. 104 million in debt. Trailing twelve month cash flow margin is excellent at nearly 13%, but this is due to historically high egg prices - the company only averages about a 4% FCF margin historically. The same goes for return on tangible capital, with historical levels well below current values. In an average year, Cal-Maine would not be considered an exceptionally attractive business, statistically speaking.

MagicDiligence Opinion

One thing to be careful of when following the Magic Formula is commodity stocks. Commodities have very volatile price swings and are heavily cyclical, in general. Unfortunately, the Magic Formula tends to turn these stocks up at the peak of the cycle, and throw them out at the bottom. This is the exact OPPOSITE of how to play a cyclical industry!

Eggs are an extremely cyclical commodity, and Cal-Maine's revenues are almost totally dependent on the wholesale egg price. Egg prices are currently at historical highs as rational pricing rules the day right now. But Cal-Maine is only 2 years removed from 2 straight years of net losses as egg prices were almost half of what they are today. In a normal year, the company's return on capital figures would not get it anywhere near the Magic Formula screen. Historically, commodity prices are boom and bust, and while Cal-Maine currently enjoys a boom period, we think the market is right to price in future weaknesses.

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The information on this website is for informational purposes only. No warranty is provided or implied as to the accuracy, completeness, or timeliness of this information. This information may not be construed as investment advice of any kind. The proprietor of this website is not responsible in any way for losses or damages resulting from the use of this information.

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Star

Cal-Maine Foods, Inc.
CALM

Industry
Food Production - Eggs

Competitors
Rose Acre Farms (private)
Moark (private)
Michael Foods (private)

Current Price/Change
$21.65 -0.54 (-2.43%)

Market Capitalization is calculated like:

Market Cap = Share Price * Number of Shares

Market capitalization is the price you would have to pay to acquire the entire company on the open market (at current prices). MagicDiligence categorizes companies into 3 size classes:

Large Cap: Over 10 billion market cap.

Mid Cap: Between 2 and 10 billion market cap.

Small Cap: Under 2 billion market cap.

Market Cap (Millions)
513 (Small Cap)

Dividend Yield is calculated as:

Dividend Yield = Annual Dividend / Stock Price

Dividends are cash payments that companies make to shareholders, usually quarterly although sometimes annually. Dividends can be thought of as interest on a stock share.

Dividend Yield
6.84%

The formula for Earnings Yield is:

Earnings Yield = EBIT / Enterprise Value

Earnings Yield tells you how much the company has produced in income relative to the price you paid for it. This can be compared to the yield on a traditional fixed income investment such as a bond, CD, or money market account. Very high earnings yields indicate a cheaply priced stock, relative to trailing earnings. Earnings Yield is one of the two statistics used by the Magic Formula screening strategy.

Earnings Yield
26.40%

Free Cash Yield is calculated like:

Free Cash Yield = Free Cash Flow / Enterprise Value

Free Cash Yield is a more telling version of Earnings Yield. While a company can easily manipulate earnings, the cash it collects and spends is very discrete. Since the value of a business is directly related to the cash it produces for owners, Free Cash Yield is a better valuation statistic than Earnings Yield. The concept is the same, however.

Free Cash Yield
17.92%

EV/S stands for Enterprise Value over Sales. This is calculated like:

EV/S = Enterprise Value / Total Revenues

Several studies have confirmed that stocks with low EV/S ratios, particularly under 1.0, have historically been excellent investments. Although the Magic Formula strategy is based on Earnings Yield, combining successful strategies is one way to improve results, and that is why EV/S is listed here.

EV/S
0.71

Return on Tangible Capital is calculated like:

ROTC = EBIT / Tangible Invested Capital

where:

Tangible Invested Capital = Total Assets - Goodwill - Intangibles - Excess Cash - Non-Debt Current Liabilities

Return on Tangible Capital is the 2nd statistic used by the Magic Formula screen. Its purpose is to identify companies that efficiently invest money to generate the highest returns. Exceptional firms can consistently generate 30% or higher returns on capital. MagicDiligence lists both one-year and five-year averages for this statistic to help weed out companies that can consistently generate high returns from those that benefit temporarily from a fad product or high commodity prices.

Return on Tangible Capital
56.2% (ttm)
26.7% (5yr avg)

Free Cash Flow Margin calculation:

FCF Margin = Free Cash Flow / Revenues

The percentage of sales that is available as free cash flow. Free cash flow can be reinvested back into the business, paid out to shareholders, used to pay off debt, or saved for a rainy day. Higher values indicate more profitable firms. MagicDiligence likes to see 5% or higher.

Free Cash Flow Margin
12.7% (ttm)
4.1% (5yr avg)

Excess cash is calculated like:

Excess Cash = Cash - (Current Liabilities - Current Assets + Cash)

Excess Cash refers to cash on the balance sheet that is not required to cover current liabilities, should the need arise. In theory, if the company had to be liquidated, this is the cash that would be left over for shareholders. It is useful in approximating what cash is invested in the business and what is extra.

Excess Cash
88M

Debt is simply the total amount of debt, short-term and long-term, listed by the company in the most recent quarterly or annual report.

Debt
104M

Coverage Ratio is calculated like:

Coverage Ratio = EBIT / Net Interest Expense

If Net Interest Expense is 0 or higher, Coverage Ratio is listed as 0. This statistic is a financial health measure telling you how many times the company can cover debt interest obligations with operating earnings. Generally a value of 7.0 or higher is comfortable, but a Coverage Ratio of 0 is ideal.

Coverage Ratio
21.657

Debt to Equity ratio is:

Debt to Equity = Total Debt / Total Equity

This is another financial health statistic. A company finances it's business through two means: bank debt and shareholder equity. If a company is liquidated, bank debt is usually paid off before shareholders see anything. A high debt-to-equity ratio (over 0.80) can be a sign of too much debt, although this varies by business. An ideal value is 0.

Debt to Equity Ratio
0.487

Click this link to view all MagicDiligence Research Notes on this stock in chronological order.

Research Notes


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Feb 14, 2008