Cal-Maine Foods CALM S
April 21, 2008 - 10:59am EST by
edward965
2008 2009
Price: 29.50 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 704 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT
Borrow Cost: NA

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Description

CALM (short).  Fair warning: borrow is tight, short interest = ~95%. 

Cal-Maine is an unremarkable egg producer in a commodity industry that, over the long term, earns its cost of capital and should trade at 1x 2009(E) book value instead of 2.3x.  (56% price drop).  Currently, the industry is earning ~100% pre-tax ROC, more than double anything since WWII.  However, by year end the supply/demand for egg layers will rebalance, leading to an 80%+ drop in earnings.  In preparation, non-family insiders have aggressively sold almost every share they have into this rally. 

 

Previously written up on VIC, I would normally hesitate to repeat a good write-up, but industry supply constraints (and earnings) have been much stronger than most anticipated, so I add my analysis.

 

MC: $704M, EV: $708M

Share price: $29.5, Target price $12 - $15 (depends on valuation method)

Expected CY ’08 EPS: $4.7, CY ’09: $0.79

 

Industry-wide pre-tax ROIC: 1959 – 2008

2008:                           98%

Average:                     10%

High before ‘08:         37%

Low:                            -20%

Std dev:                       19%

 

 

Table of Contents:

1)     Background on Supply/Demand imbalance and why will rebalance 

2)     Why this is a commodity business

3)     Prior egg bull markets – analysis

4)     Corn price (feed) vs. egg price relationship

5)     Insider actions

6)     Alternate thesis

7)     Valuation methods

8)     Risks to thesis

 

1. Current supply/demand imbalance – main cause

  • Supply of “layers” (hens that lay eggs) dropped 4% peak to trough due new regulations that give each hen more cage space (fewer hens/cage)
  • Before, chickens were put in battery cages (7-9 per cage) with an average of 53-56 square inches each, which does not allow for standing or resting.
  • Now, US producers have mostly voluntarily agreed to expand hen space to 67 square inches phased in over six years (‘02-‘08).  Using the same facilities/cages, this removing ~15-25% chickens from each cage.  Happier chickens do lay ~7% more eggs, so net/net isn’t so bad.

 

What is the differential opinion/ what did people miss? 

  • Everyone knew that cages would get smaller over four increments in 6 years.
  • However, nothing I’ve read (including the official paper by the regulator) suggests an understanding that only one of those increments mattered and the other three made little supply difference. (But, practically the only two CALM insider open market purchases ever were Feb and July 2007)
  • Why: Cage math –  two common cage size, each behave differently:
    • The average large egg producer was mostly already complying with the 2002 regulations. Hence, little change at first incremental step.
    • 24x20 cage (~50% of market):  The small incremental size changes (3 inches) meant that the 9 inch space change caused by removing one bird only need to happen once per three steps.
    • 16x20 cage: Although two hens have to be removed, the first one hurts less because the remaining hens get more productive (lower mortality, more eggs per).  The second hen removed doesn’t matter as much.
  • How/ When
    • Post October 2006 hatches had the new size restriction, which meant April/May 2007 was when those hatches were mature and started laying, the same time that supply cratered.
    • The industry is used to 1-2% supply changes, and can’t adjust that quickly to something of that magnitude

 

24x20 cage – hens per cage by year
 

Year

Regulation limit inches per hen

Actual space/hen

Hens/cage

April ‘02+

56

60.0

8

Oct ‘03+

59

60.0

8

Oct ‘06+

64

68.6

7

April ‘08+

67

68.6

7

 

16x20 cage – hen layer productivity goes up as space per hen increases

Year

Hens/Cage

Eggs/Hen

Productivity change

Total Eggs per cage

Net Egg Loss

April ‘02+

7

185

 

1295

 

Oct ‘06+

6

194

+4.9%

1164

-10.1%

April ‘08+

5

198

+2.1%

990

-14.9%

Sources: United Egg Producers; Caged Laying Hen Well-Being, An Economic Perspective

 


 

Data on new hens points to balanced supply picture late ‘08

  • Current: YoY egg layer (hen) count down 2.4%
  • Q4 ’08: 1.6% YoY increase
    • November – December ‘07 pullet hatches (young hens) were +7% and +8.8% year over year (these will be layers by May/June, 2008).
  • Pullet hatching YoY: Good forward indicator for prices 6-12 months later
    • Late ’06: hatch rates down 7%, 2007 egg pricing high
    • Late ’04: Pullet hatching up 10%, 2005 prices cratered
    • Mid ’07: Hatch rates down, 2008 prices sky high

 

CALM Gross Margins vs. Hen Flock size.  As one would expect in a commodity industry with stable demand (usually), changes in supply drive margins.  Seasonality drives some higher margins (around Christmas and Easter egg prices are higher)

 

Quarter            Flock size YoY           CALM GP       Stock Price

Q4 02              +0.0%                         24%                 $1.8

Q1 03              +0.3%                         21%                 $1.9

Q2 03              -0.1%                          23%                 $2.7

Q3 03              -1.3%                          34%                 $3.8

Q4 03              -0.8%                          35%                 $18.4

Q1 04              +1.4%                         28%                 $17.8

Q2 04              +3.1%                         10%                 $14

Q3 04              +3.4%                         5%                   $11

Q4 04              +2.5%                         17%                 $12.1

Q1 05              +2.5%                         3%                   $7.9

Q2 05              +0.3%                         1%                   $6.1

Q3 05              -0.4%                          13%                 $6.3

Q4 05              +0.7%                         20%                 $6.8

Q1 06              +0.1%                         14%                 $7.3

Q2 06              +1.8%                         7%                   $6.9

Q3 06              +0.8%                         18%                 $6.6

Q4 06              -0.5%                          25%                 $8.6

Q1 07              -1.0%                          24%                 $13.5

Q2 07              -1.9%                          18%                 $16.4

Q3 07              -1.5%                          34%                 $25.2

Q4 07              -1.1%                          46%                 $26.5

Q1 08              -1.0%                          38%                 $35.2

Q2 08E            +0.1%

Q3 08E            +1.2%

Q4 08E            +1.6%

 

 
Also, some investors have confused hatchings with flock size, and said that because hatchings were up 1% last year, than flock size ergo must go up, more eggs laid, prices down, etc.  However, this has to be looked at in conjunction with the flock age.

 

Flock size = existing hens – deaths – moltings – missings (exports) + hatchings.

 

Since the flock size was quite old last year (due to spike in hatchings in 2005, which die in 2 years), the 2007 hatchings went to replace those dead birds, and weren’t even sufficient.  The current flock age is several % below average vs. several % above average last year.

 

Still, precision is not available, as things happen (diseases, etc).

 
 

2. Why this business is a commodity business

1)     No returns to scale.  Since 1993, Cal-Maine SG&A per egg has increased 2.2%/year even as volume has increased 80%. The economics are local.

2)     Highly fractured market.  61 companies have flocks of 1 million hens (280 million hens nationwide).  Interestingly, there have been exactly 61 producers with 1 million hens or more in the years 2006, 1996, and in 1985.

3)     Ease of entry high over medium term.  Poultry farms are generally on very poor soil without alternate uses.

a.      Capex: Bigger cage facility costs are only 3-6 cents/dozen eggs more.

b.     Environmental: A poultry producer (chickens, not eggs) near my town said the PETA people and environmental people are being tougher on the small owners, which often run looser, but overall not a big deal for most producers which already run on tighter standards (they have to – WMT and MCD don’t want to have hen abuse added to their list).

4)     Strong power of customers:

·       Sales are based on the wholesale egg index, and are short-term contracts.

·       Customer concentration high.  Top 3 customers are ~50% of sales (WMT, Sam’s Club, and HE Butt Grocery/HEB).

·       Eggs not branded - Eggs at HEB show the address of one of CALM’s plants, but no name of who makes it.

 
 

3. Prior egg bull markets: - causes and analysis

 
            1948-58       1973-91         2003-2004      2007+

Length/yrs                           10                    18                    2                      ?

ROIC                                ?                      20%                 20%                

EBIT %                             24%                 12%                 13%              35%

Population g/yr                   2%                   1%                   1%                   1%

Per capita usage/yr             2.1%                -3.5%              1.7%                -1.0%

Cage space.hen                                                                -1.6%              -2.5%

Exports                                                                             Flat                  +0.3%

 

Note: Are calendar year figures.  CALM uses a different fiscal year.

 

Comments on drivers for each market:

1)     1948 – 1958: Post-war boom + high population growth/ demand =+4.1% demand and the longest egg bull market since the 1868-1874 market.

2)     1973-91: Although volatile, prices held up, and had 2x the gross margin (egg price – feed cost) that the 1960s had.  Reasons not obvious –they potentially include a very poor 1960s, which meant that producers were loath to add capital to the system, producers whipsawed by feed prices, and general price inflation could have made it easier for prices to stick.  Risk is that we repeat the 1970s, which I detail elsewhere.

3)     2003-2004: Atkins diet pushed demand/capita up 1.7%.  Also, the late 2002 hen hatch was 5.7% lower than a year prior, which meant low supply in 2003 was coupled with high demand. 

 

 

4. Corn vs. egg prices – a cause of a lot of confusion

 

Corn and egg follow each other since feed is ~50% of all-in cost to produce an egg. Confusing price with margins, some longs have bought CALM as a beneficiary of the agriculture price boom since egg prices are rising, following corn price inputs to some degree.  However, corn price spikes in 1974, 1980, and 1996 didn’t lead to higher margins for any length of time.

 

However, there are risks to margins:

1)     Price down: Producers used to rising corn prices might hedge at a high price, and if corn prices drop quickly, will find themselves without the cash to expand or even bankrupt, leaving non hedgers with large margins.  Without hard data, some articles suggest this happened in the 1970s in some livestock producing industries.

2)     Price up:  Shell-shocked producers might hold back expanding flocks until the picture is clearer. 

 

5. Insider Actions

Insider sales: The top four non-family officers have sold 34%, 64%, 90%, and 100% of their shares since July.  The top two positions (President and CEO, family members) only sold 10% since they have a stated goal of keeping control within the family.

 

Insiders are excellent market timers, and right now almost no exercisable options remain for non-family- they’ve sold all they got. 

 

More examples:

Time               Event                           Stock price                   Stock price in t+ 6 mo.

Q3 ’03             Offer to go private                  $3.7                             $20

Q1 ’04             Insiders sell 600K                   ~$20                           $12

Q4 ’04             Sell last of disposable shares  ~$12                           $6

Q3 ’05             First option grant since ’99:      $6                             $6

Q4 07              500K shares sold over 3 Qs      $20-$40

 

 

6. Alternate scenario:

It’s possible that eggs have above-average returns for a period longer than standard economics would suggest.  Previous egg bull markets have lasted up to 18 years, with the industry having ~20% pre-tax ROC during that time.   This could happen because egg producers say, “I don’t want to add capacity since adding always creates lower margins for me.”  The most recent hatchings of new hens and the unconcentrated nature of competition would dispute that possibility, but it’s possible.  Based on 20% ROC/9% EBIT margin, flat growth multiple of 13x EPS of $1.55/share, and the cash earnings accruing from CY 2008 ($4.7), the stock price would be $25.

 

7. Risks to thesis

1)     Avian flu.  With the US flock indoors, the risk isn’t huge, but having your competitors wiped out is always good for pricing.

2)     Export growth.  Since exports are only 2.7% of US output, growth of ~20%/year is easily adjusted to.  China is only 2.2% of US exports (.058% of total demand).  That said, dried eggs are easily exportable (economics work) as seen in the powdered milk industry.

3)     Roll-up – Cal-Maine could use an inflated stock price to buy competitors.

4)     Changes in US diets.  A new high protein diet fad could change demand.  On the flip side, increased prices in the 1970s (prices 2x) caused a 11% decline in per capital usage (72 – 76), the largest five year decline since the great depression, so current high prices might cause egg users to cut back a bit. 

 

8. Valuation methods:

‘1) Book value: Cal-Maine’s Hillandale acquisition in 2005 was 1x book value (added 5M hens to 18M hens (+28%))

·       Based on a single digit pre-tax return on capital over the long term (admittedly with high variation), ~1x BV seems correct ($13/share)

2)     P/E: 13x 2009 P/E of $.77/share = $10.3, + projected CY 2008 cash earnings of $4.7 for $15.  Implies a pre-tax ROC at 10%, EBIT margin 5%

3)     Competitors: Tyson Foods and Pilgrim’s Pride both trade at 1.3x BV.  While Pilgrim’s raises all types of poultry, including egg layers, the broiler industry is more concentrated – the top 4 firms have 59% of the market, vs. 20% for eggs. 

4)     EV/Egg Layer: Cal-Maine at $39EV/hen.  Paid $11 per hen for Hillandale in 2005, and paid from $2 to $8 in for the six companies bought in the 1990s.

5)     Replacement cost: Brand-new facilities would cost $400M - $450M, or ~$18/share.  Most of Cal-Maine’s capacity was built before the early 1990s.

 

 

 

 

 

Catalyst

    sort by    

    Description

    CALM (short).  Fair warning: borrow is tight, short interest = ~95%. 

    Cal-Maine is an unremarkable egg producer in a commodity industry that, over the long term, earns its cost of capital and should trade at 1x 2009(E) book value instead of 2.3x.  (56% price drop).  Currently, the industry is earning ~100% pre-tax ROC, more than double anything since WWII.  However, by year end the supply/demand for egg layers will rebalance, leading to an 80%+ drop in earnings.  In preparation, non-family insiders have aggressively sold almost every share they have into this rally. 

     

    Previously written up on VIC, I would normally hesitate to repeat a good write-up, but industry supply constraints (and earnings) have been much stronger than most anticipated, so I add my analysis.

     

    MC: $704M, EV: $708M

    Share price: $29.5, Target price $12 - $15 (depends on valuation method)

    Expected CY ’08 EPS: $4.7, CY ’09: $0.79

     

    Industry-wide pre-tax ROIC: 1959 – 2008

    2008:                           98%

    Average:                     10%

    High before ‘08:         37%

    Low:                            -20%

    Std dev:                       19%

     

     

    Table of Contents:

    1)     Background on Supply/Demand imbalance and why will rebalance 

    2)     Why this is a commodity business

    3)     Prior egg bull markets – analysis

    4)     Corn price (feed) vs. egg price relationship

    5)     Insider actions

    6)     Alternate thesis

    7)     Valuation methods

    8)     Risks to thesis

     

    1. Current supply/demand imbalance – main cause

     

    What is the differential opinion/ what did people miss? 

     

    24x20 cage – hens per cage by year
     

    Year

    Regulation limit inches per hen

    Actual space/hen

    Hens/cage

    April ‘02+

    56

    60.0

    8

    Oct ‘03+

    59

    60.0

    8

    Oct ‘06+

    64

    68.6

    7

    April ‘08+

    67

    68.6

    7

     

    16x20 cage – hen layer productivity goes up as space per hen increases

    Year

    Hens/Cage

    Eggs/Hen

    Productivity change

    Total Eggs per cage

    Net Egg Loss

    April ‘02+

    7

    185

     

    1295

     

    Oct ‘06+

    6

    194

    +4.9%

    1164

    -10.1%

    April ‘08+

    5

    198

    +2.1%

    990

    -14.9%

    Sources: United Egg Producers; Caged Laying Hen Well-Being, An Economic Perspective

     


     

    Data on new hens points to balanced supply picture late ‘08

     

    CALM Gross Margins vs. Hen Flock size.  As one would expect in a commodity industry with stable demand (usually), changes in supply drive margins.  Seasonality drives some higher margins (around Christmas and Easter egg prices are higher)

     

    Quarter            Flock size YoY           CALM GP       Stock Price

    Q4 02              +0.0%                         24%                 $1.8

    Q1 03              +0.3%                         21%                 $1.9

    Q2 03              -0.1%                          23%                 $2.7

    Q3 03              -1.3%                          34%                 $3.8

    Q4 03              -0.8%                          35%                 $18.4

    Q1 04              +1.4%                         28%                 $17.8

    Q2 04              +3.1%                         10%                 $14

    Q3 04              +3.4%                         5%                   $11

    Q4 04              +2.5%                         17%                 $12.1

    Q1 05              +2.5%                         3%                   $7.9

    Q2 05              +0.3%                         1%                   $6.1

    Q3 05              -0.4%                          13%                 $6.3

    Q4 05              +0.7%                         20%                 $6.8

    Q1 06              +0.1%                         14%                 $7.3

    Q2 06              +1.8%                         7%                   $6.9

    Q3 06              +0.8%                         18%                 $6.6

    Q4 06              -0.5%                          25%                 $8.6

    Q1 07              -1.0%                          24%                 $13.5

    Q2 07              -1.9%                          18%                 $16.4

    Q3 07              -1.5%                          34%                 $25.2

    Q4 07              -1.1%                          46%                 $26.5

    Q1 08              -1.0%                          38%                 $35.2

    Q2 08E            +0.1%

    Q3 08E            +1.2%

    Q4 08E            +1.6%

     

     
    Also, some investors have confused hatchings with flock size, and said that because hatchings were up 1% last year, than flock size ergo must go up, more eggs laid, prices down, etc.  However, this has to be looked at in conjunction with the flock age.

     

    Flock size = existing hens – deaths – moltings – missings (exports) + hatchings.

     

    Since the flock size was quite old last year (due to spike in hatchings in 2005, which die in 2 years), the 2007 hatchings went to replace those dead birds, and weren’t even sufficient.  The current flock age is several % below average vs. several % above average last year.

     

    Still, precision is not available, as things happen (diseases, etc).

     
     

    2. Why this business is a commodity business

    1)     No returns to scale.  Since 1993, Cal-Maine SG&A per egg has increased 2.2%/year even as volume has increased 80%. The economics are local.

    2)     Highly fractured market.  61 companies have flocks of 1 million hens (280 million hens nationwide).  Interestingly, there have been exactly 61 producers with 1 million hens or more in the years 2006, 1996, and in 1985.

    3)     Ease of entry high over medium term.  Poultry farms are generally on very poor soil without alternate uses.

    a.      Capex: Bigger cage facility costs are only 3-6 cents/dozen eggs more.

    b.     Environmental: A poultry producer (chickens, not eggs) near my town said the PETA people and environmental people are being tougher on the small owners, which often run looser, but overall not a big deal for most producers which already run on tighter standards (they have to – WMT and MCD don’t want to have hen abuse added to their list).

    4)     Strong power of customers:

    ·       Sales are based on the wholesale egg index, and are short-term contracts.

    ·       Customer concentration high.  Top 3 customers are ~50% of sales (WMT, Sam’s Club, and HE Butt Grocery/HEB).

    ·       Eggs not branded - Eggs at HEB show the address of one of CALM’s plants, but no name of who makes it.

     
     

    3. Prior egg bull markets: - causes and analysis

     
                1948-58       1973-91         2003-2004      2007+

    Length/yrs                           10                    18                    2                      ?

    ROIC                                ?                      20%                 20%                

    EBIT %                             24%                 12%                 13%              35%

    Population g/yr                   2%                   1%                   1%                   1%

    Per capita usage/yr             2.1%                -3.5%              1.7%                -1.0%

    Cage space.hen                                                                -1.6%              -2.5%

    Exports                                                                             Flat                  +0.3%

     

    Note: Are calendar year figures.  CALM uses a different fiscal year.

     

    Comments on drivers for each market:

    1)     1948 – 1958: Post-war boom + high population growth/ demand =+4.1% demand and the longest egg bull market since the 1868-1874 market.

    2)     1973-91: Although volatile, prices held up, and had 2x the gross margin (egg price – feed cost) that the 1960s had.  Reasons not obvious –they potentially include a very poor 1960s, which meant that producers were loath to add capital to the system, producers whipsawed by feed prices, and general price inflation could have made it easier for prices to stick.  Risk is that we repeat the 1970s, which I detail elsewhere.

    3)     2003-2004: Atkins diet pushed demand/capita up 1.7%.  Also, the late 2002 hen hatch was 5.7% lower than a year prior, which meant low supply in 2003 was coupled with high demand. 

     

     

    4. Corn vs. egg prices – a cause of a lot of confusion

     

    Corn and egg follow each other since feed is ~50% of all-in cost to produce an egg. Confusing price with margins, some longs have bought CALM as a beneficiary of the agriculture price boom since egg prices are rising, following corn price inputs to some degree.  However, corn price spikes in 1974, 1980, and 1996 didn’t lead to higher margins for any length of time.

     

    However, there are risks to margins:

    1)     Price down: Producers used to rising corn prices might hedge at a high price, and if corn prices drop quickly, will find themselves without the cash to expand or even bankrupt, leaving non hedgers with large margins.  Without hard data, some articles suggest this happened in the 1970s in some livestock producing industries.

    2)     Price up:  Shell-shocked producers might hold back expanding flocks until the picture is clearer. 

     

    5. Insider Actions

    Insider sales: The top four non-family officers have sold 34%, 64%, 90%, and 100% of their shares since July.  The top two positions (President and CEO, family members) only sold 10% since they have a stated goal of keeping control within the family.

     

    Insiders are excellent market timers, and right now almost no exercisable options remain for non-family- they’ve sold all they got. 

     

    More examples:

    Time               Event                           Stock price                   Stock price in t+ 6 mo.

    Q3 ’03             Offer to go private                  $3.7                             $20

    Q1 ’04             Insiders sell 600K                   ~$20                           $12

    Q4 ’04             Sell last of disposable shares  ~$12                           $6

    Q3 ’05             First option grant since ’99:      $6                             $6

    Q4 07              500K shares sold over 3 Qs      $20-$40

     

     

    6. Alternate scenario:

    It’s possible that eggs have above-average returns for a period longer than standard economics would suggest.  Previous egg bull markets have lasted up to 18 years, with the industry having ~20% pre-tax ROC during that time.   This could happen because egg producers say, “I don’t want to add capacity since adding always creates lower margins for me.”  The most recent hatchings of new hens and the unconcentrated nature of competition would dispute that possibility, but it’s possible.  Based on 20% ROC/9% EBIT margin, flat growth multiple of 13x EPS of $1.55/share, and the cash earnings accruing from CY 2008 ($4.7), the stock price would be $25.

     

    7. Risks to thesis

    1)     Avian flu.  With the US flock indoors, the risk isn’t huge, but having your competitors wiped out is always good for pricing.

    2)     Export growth.  Since exports are only 2.7% of US output, growth of ~20%/year is easily adjusted to.  China is only 2.2% of US exports (.058% of total demand).  That said, dried eggs are easily exportable (economics work) as seen in the powdered milk industry.

    3)     Roll-up – Cal-Maine could use an inflated stock price to buy competitors.

    4)     Changes in US diets.  A new high protein diet fad could change demand.  On the flip side, increased prices in the 1970s (prices 2x) caused a 11% decline in per capital usage (72 – 76), the largest five year decline since the great depression, so current high prices might cause egg users to cut back a bit. 

     

    8. Valuation methods:

    ‘1) Book value: Cal-Maine’s Hillandale acquisition in 2005 was 1x book value (added 5M hens to 18M hens (+28%))

    ·       Based on a single digit pre-tax return on capital over the long term (admittedly with high variation), ~1x BV seems correct ($13/share)

    2)     P/E: 13x 2009 P/E of $.77/share = $10.3, + projected CY 2008 cash earnings of $4.7 for $15.  Implies a pre-tax ROC at 10%, EBIT margin 5%

    3)     Competitors: Tyson Foods and Pilgrim’s Pride both trade at 1.3x BV.  While Pilgrim’s raises all types of poultry, including egg layers, the broiler industry is more concentrated – the top 4 firms have 59% of the market, vs. 20% for eggs. 

    4)     EV/Egg Layer: Cal-Maine at $39EV/hen.  Paid $11 per hen for Hillandale in 2005, and paid from $2 to $8 in for the six companies bought in the 1990s.

    5)     Replacement cost: Brand-new facilities would cost $400M - $450M, or ~$18/share.  Most of Cal-Maine’s capacity was built before the early 1990s.

     

     

     

     

     

    Catalyst

    Messages


    SubjectGreenshoes
    Entry04/30/2008 10:49 AM
    Memberedward965

    Unfortunately, no, don't have other related ideas. Pilgrim’s Pride has a very small % of their business in eggs, but no other egg producer in the US is public.

    Not aware of a similar campaign in broiler (meat) chickens, and even if there were it would depend on how the change was structured.

    I haven’t looked internationally, and would think that they would have different economic drivers since they aren’t going through this cage crisis.

    Also, egg prices (vs. egg margins) can be driven by feed prices, so I can’t make a call on absolute egg prices without also calling corn, which I’m not doing. Hence, I haven’t thought about whether any large consumers of egg products will get a boast from lower egg prices.

    Subjectspecialty eggs
    Entry06/12/2008 02:37 PM
    Memberfinn520
    Saw a blip on Cal-Maine in a recent Business Week, and the following caught my eye:
    http://www.businessweek.com/magazine/content/08_23/b4087044058036.htm?chan=search

    "Premium-priced eggs—commanding as much as $6 per dozen, vs. about $2.20 for the standard type—now contribute 15% of company revenues, up from just 5% five years ago."

    Speicalty eggs as % of slaes has gone from 8.2% in 2004 to 15.2% in 2007. Anyone have any insight into the profitability of specialty eggs? Is this a better business than regular eggs, and if so, by how much? I scanned through previous writeups/comments and did not see this addressed.

    Thanks.

    Subjectfinn520
    Entry06/18/2008 01:22 PM
    Memberedward965
    Hi Finn, I forgot about your post, so sorry for the delay. You’re probably familiar with what types of specialty eggs (nearly all cage free) are on shelves due to your background, so I’ll skip to profit/egg type. I thought about this issue before, and my thought is that if free range eggs replace cage eggs, and assuming constant egg consumption per capita (so one more specialty egg means one less regular egg), then: 1) Reduces utilization of caged hens. A reduction of ~2% would just kill margins 2) Also, Cal-Maine does not have any specialized knowledge nor equipment to produce, so no inherent advantage. Nor does distribution power seen to matter much to the industry since aren’t shipping grower to store anyway. If I’m wrong, it’d be because: 1) Specialty eggs grow the entire market 2) Cal-Maine somehow ties up the egg distribution network But, my thoughts are theorizing, not talking with specialty egg experts (if that matters anyway).

    Subjectfinn520
    Entry06/18/2008 01:22 PM
    Memberedward965
    Hi Finn, I forgot about your post, so sorry for the delay. You’re probably familiar with what types of specialty eggs (nearly all cage free) are on shelves due to your background, so I’ll skip to profit/egg type. I thought about this issue before, and my thought is that if free range eggs replace cage eggs, and assuming constant egg consumption per capita (so one more specialty egg means one less regular egg), then: 1) Reduces utilization of caged hens. A reduction of ~2% would just kill margins 2) Also, Cal-Maine does not have any specialized knowledge nor equipment to produce, so no inherent advantage. Nor does distribution power seen to matter much to the industry since aren’t shipping grower to store anyway. If I’m wrong, it’d be because: 1) Specialty eggs grow the entire market 2) Cal-Maine somehow ties up the egg distribution network But, my thoughts are theorizing, not talking with specialty egg experts (if that matters anyway).

    Subjectnatey
    Entry06/27/2008 02:03 PM
    Memberedward965
    Natey, As per my write-up, I estimated Q3 2008, so now. I don’t have any significant new data and precision is not my specialty. However, I was curious about the very recent buy of another poultry plant, a fairly large buy (add 9% to capacity). I was hoping terms were disclosed but they were not, and historically prices of plants have been disclosed. I would be shocked if it turns out this was anything but a stock transaction, and also frankly surprised that we haven’t seen more of these. If I were the CEO, I’d buy everything I could with my overpriced currency, and that helps the shorts in the long term since current holders are even more diluted, at least if my short thesis is correct. Was an article on DJ Newswire today, things look bullish, large short interest, etc – nothing new but probably pushing the stock up.

    SubjectRE: Barrons
    Entry07/07/2008 02:39 AM
    Memberdoobadoo802
    Article's got feed wrong. Corn and Soy are running about 2x as high as last year. It remains to be seen how quickly that will pass into feed costs, as i suspect a portion of reported feed costs have older costs basis and imputed amortization off feed used to raise last years hens etc. So reported feed costs stagger higher as opposed to pop. But at these grain prices i put go-forward feed costs in the neighborhood of $.50-$.60/dozen, its hard to gauge with all the volatility.

    SubjectMea Culpa
    Entry08/18/2008 02:22 PM
    Memberedward965
    I gave this one a 7. While in no way is Cal-Maine not a short today, I got some things wrong in the writeup. If everyone in the industry “knows” a supply glut is coming, and they can control that glut, will it actually happen? The signs are that the glut will still happen eventually, but arguably this cycle is different than in 2004, because in 2004 the industry thought Atkins would continue and so they ramped up production. Today, everyone is scared of the downcycle and so may not over produce so much, at least for a while. A corollary can be drawn to the oil industry. In the early 1980s everyone thought the good times would continue and so they overproduced in the face of demand destruction. In the early 2000s, a generation of poor times chastened producers and they were really slow to do much (with a few exceptions). I think this is a good comparison to the egg industry in that shorting an up cycle after such a poor time for the industry isn’t often a good idea. That said, should this company trade for 4x book value? Absolutely not, but suggesting a short at $30 (vs. $48 today), with a short interest ratio at 100%, was a poor call on my part.

    Subjectbruno
    Entry08/18/2008 04:12 PM
    Memberedward965
    Yes, I would still short, but no options. 4x Book Value is loopy, but I could see egg prices remaining higher than one would expect for this business (say 20% ROC, supporting 2x BV or so, instead of the 5-10% range seen in the last 2 decades). The egg business has run several years in a row (up to 10 in the 1970s) at 20% ROC, and so that could happen, I suppose. That said, it wouldn't be a very large short position as I could be wrong for a while and due to the short interest. As David Einhorn said in his book, 2x silly is still just silly (in reference to prices going nuts), and I'm no longer sure about the short-term catalysts, which probably precludes options given their length of only out to Feb 2009. The reason for the message was partly a self reflection of what I did wrong and to help me, in the future, because no doubt I made that analytical error that I referenced. At $30 this was not a good short.

    SubjectBruno
    Entry09/30/2008 10:34 PM
    Memberedward965
    Bruno, Nothing substantial to add... I read that collusion article and almost fell over. All this time I couldn’t figure out why small chicks were being hatched and more supply wasn’t coming on line. But, I have no insight into whether there actually was official collusion, or what defines collusion in farming. Your guess is as good as mine as to whether this causes more supply/lower prices. As far as the USDA, I learned a long time ago not to trust them. Jim Rogers once called them a bunch of 23 year olds fresh out of college. There should be supply coming on line based on my estimates, but we’ll see. Value = I’m thinking ~1.5x BV. Yes, this is a poor business, but I think it has been poor so long that the producers won’t overproduce as much as the past. At $20 I’m covering. Thanks for the compliment – sorry I can’t add anything substantive.

    SubjectRE: RE: Author Exit Recommendation
    Entry10/28/2014 12:13 PM
    Memberedward965
    I closed all 5 of my open VIC ideas at once.
     
     Don't have an opinion either way here, and have not been involved for a while.   Sorry, wish I could help.
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