Is This Egg In The Basket?

Mihir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For decades, this company has served scores of people across the globe, who consume its products on a daily basis. Cal-Maine Foods (NASDAQ: CALM) is the largest fresh egg producer in the United States; selling eggs to supermarket chains, food distributors, egg product manufacturers as well marketed under brand names Cal-Maine, Farmhouse among others.

The Number Game

Cal-Maine beat street estimates on revenue, but missed expectations on the earnings per share by a good margin. The revenue for the second quarter came in at $328.9 million, 13% higher than the previous year quarter’s revenue of $290.4 million. This is an indication of pretty impressive performance when we consider a still gloomy economy and industry competition. However, the thing to worry about, in my opinion, would be the drop of 38% in the earnings per share at $0.60 per share, indicating higher capital and revenue expenditures needs to be controlled with implementation of proper strategies

As has been outlined by the company in its earnings release, the net numbers suffered essentially due to an increase in the cost of its inputs including corn and soybean meal, which are fed to the animals. There has been no proper indication as to the anticipation of such increases in the input prices and it seems to stay volatile during the year. Management has to frame strategies around hedging these price increases in order to stabilize profitability. Something that provides an optimistic frame to the analysis is the nature of the demand for the product that the company deals in i.e. fresh eggs tends to be pretty stable and is poised to grow in the oncoming quarters.

Meet Your Peers

Most of the competitors that Cal-Maine competes with are privately held. However, in the food manufacturing and processing industry, it competes with Dole Food (NYSE: DOLE) that quite like Cal-Maine, provides nutrition to scores of people with its portfolio of fruits, vegetables, juices, and other such products. However, it has been going through a tough ride as now which is also somewhat reflected in its most recent sale of its worldwide packaged food and Asia fresh businesses. The fresh fruit business of the company had been a subject to constant decline in revenues, which has cast ripple effects on its share price, falling almost 13% from its IPO price.

On the other hand, Cal-Maine also distantly competes with one of the biggest food manufactures across the globe with a mammoth market cap of around $27 billion. General Mills (NYSE: GIS) recently reported its second quarter fiscal 2013 results showing good numbers as net sales grew almost 6%, due to newer acquisitions including Yoplait Canada. Some of the new products from the stable of this company are establishing good foothold in the market including Yoplait yoghurts, Nature Valley protein bars, Peanut Butter, Multigrain Cheerios among others.

Another of the big food processing giants that Cal-Maine competes with is Mondelez International (NASDAQ: MDLZ) which is a spun off unit from the Kraft Foods. The company has its primary presence in the U.S, catering to consumer needs for beverages, snacks and grocery items. In a pretty recent innovation strategy, Mondelez is seeking mobile technology in order to push up impulsive purchasing and also to positively impact the mobile retail experience for the customers.

Whether this stock should be a part of your basket?

Now as we have read about data points of the Cal-Maine story, it’s important to know whether this stock should be a part of your portfolio. Cal-Maine has maintained a strong foothold in the U.S markets, and as the company reported in fiscal 2011, it sold approximately 821.4 million eggs in the United States, which is almost 18% of the domestic shell eggs consumption. Though the slide in the results makes things skeptical, however, this has been essentially due to an increase in the input prices which was not very well anticipated and hence, in the coming quarters the management needs to take steps to hedge the price inflation.

The cash position of the company has not been quite favorable since the last couple of quarters, which is also an effect of the increasing feed costs, bringing down the net figures and not allowing the company to convert a good portion of its revenue to cash. A recent acquisition of commercial egg production division and related assets thereto of Maxim Production also added to the costs incurred in the quarter and affected profitability.

It is visible that Cal-Maine is experiencing tough times amidst challenging market situation and increasing prices of its raw materials. However, I would recommend to hold the stock, as the input prices have experienced their peaks and should descend in the next quarter. The aspect that the management needs to work on right now is to adjust their cash position by framing appropriate acquisition strategies and expense control system. This will provide valuable cushion to the company in event of any exorbitant increase in the prices of its raw materials.


MihirMehta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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