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Great Eggspectations

Posted: Dec 01, 2008 09:53 AM by Gregory S. Davis

Tickers in this Article: FDP, ADM, CALM

When people cut back on spending, the usual cuts come in the form of downgraded travel plans or skipped trips to the theater. Eggs are not usually cut from the family budget unless the economic situation is truly dire. Our commitment to farm fresh eggs is one reason to keep a close eye on egg industry leader Cal-Maine Foods (Nasdaq:CALM). Cal-Maine recently announced the acquisition of Tampa Farm Service, giving further weight to the argument that the egg industry is still going strong.

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Results of Expansion
The Mississippi-based Cal-Maine is acquiring Tampa Farm Service to expand its operations further into the southeastern U.S. market. The deal includes nearly 4 million laying hens situated in modern in-line facilities along with feed mills and delivery trucks. Cal-Maine also gains rights to the 4-Grain brand of specialty eggs and ownership interest in American Egg Products. Prior to the Merger, Cal-Maine's footprint covered 29 states in the U.S., making it the largest producer and distributor of fresh shell eggs in the country. (To learn more about corporate restructuring, read our Mergers and Acquisitions Tutorial.)

Growth of Breakfast Industry
The overall breakfast food market is expected to grow in line with its 13% growth from 2003-2008, according to a report referenced by FoodNavigator-usa.com titled "Breakfast Foods: The Market - US - November 2008". This growth could be hampered by inflation and fluctuating commodity prices that could affect feed and fuel cost. Eggs, however, will always remain popular in the U.S. They are high in protein; they are used in countless recipes and are incredibly versatile, and they are a breakfast staple along with coffee, bread and orange juice.

Valuation
Cal-Maine is a small cap stock with a market capitalization of $600 million. Larger food producers like Fresh Del Monte Produce (NYSE:FDP) and Archer Daniels Midland (NYSE:ADM) have market caps of $1.6 billion and $17.5 billion respectively. Depending on the source, Cal-Maine has a beta between 0.41 and 1.0, but the stock's 12-month return of 8.4% suggests a low correlation to the volatility a broad index like the S&P 500. One area of note concerning Cal-Maine stock is its high short-interest of 9.4%. A short interest ratio above 2.0 suggests a stock may rise in the future as investors who are currently short selling Cal-Maine will have to purchase shares of the stock in the future to cover their positions. (To learn more about the short interest ratio, read Short Interest: What It Tells Us.)

Final Thoughts
Consider your own shopping habits. Have you eliminated many eggs from your grocery list? The overall outlook for breakfast foods like eggs is positive, but doing your own grassroots research could prove to be invaluable before deciding if Cal-Maine is right for your portfolio.

By Gregory S. Davis

Gregory S. Davis is an investment writer and consultant for his company G.Davis Capital Inc. His core methodology for choosing investments include patience, diversification and asset due diligence. Gregory is a graduate of the Wharton School of Business. He is also a board member of StoriesWork, a non-profit organization based in Durham, NC that uses storytelling to empower youth and individuals to utilize alternative dispute resolution tactics.

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