I have been studying CALM since it first popped up on the OSV Benny Graham Checklist back in October. At that time it was down below $30 due to the recall [which it voluntarily participated even though no CALM eggs were cited for contamination].
This is my research and theory on this company:
This company is in excellent financial health: great current ratio, plenty of cash, Bookvalue of $16. Retained earnings have grown well for the past 10 years. The companies growth strategy so far appears to be two-fold: acquisition of small egg farms and increase in specialty eggs. This is THE egg company in the US. No publicly traded competitors touch it. CALM has been growing its specialty eggs each year, and these eggs have grown from a tiny fraction of sales to over 20% of revenue. These eggs carry higher margins which is great for CALM's operating margins. The company is closely held, with the new CEO [former founder stepped down this Fall] the son-in-law to the founder. Looking through the Bios of the Board on the CALM website you'll see people who have been ingrained in CALM and the egg industry for decades. These are egg heads for sure. Big retailers are on the side of CALM, Walmart & Sam's Club are among the major clients bringing in over 1/3 of sales. Continued weakness in food service and restaurant sales have been offset with continued demand in the retail sector.
From its 2010 10-K, "CALM states that the egg industry has traditionally been subject to periods of high profitability followed by periods of significant loss. The periods of high profitability reflect increased consumer demand relative to supply while the periods of significant loss reflect excess supply for the then prevailing consumer demand." The worst quarters for egg sales traditionally have been those ending in May & Aug. When the Great Recession hit, CALM's response was to kill off a portion of its flock to retain prices. This helped stave off large losses in those years, and in the meantime CALM's specialty eggs have really carried the sales.
Grain prices are the biggest non-fixed cost for CALM. Higher grain prices hurt the bottom-line UNLESS CALM can raise prices accordingly. Interestingly according to the 2009 10-K, CALM reports high profit margins when feed costs are higher. I am speculating that CALM tries to guess in the appropriate raise in prices to anticipate the higher feed costs.
The Bad: This is a flaky industry, and egg recalls can happen anytime and hurt sales. The public taste for eggs is cyclic and may go away. The dividend is tied directly to 1/3 of income, and will fluctuate. The operating margins are tight, not leaving a wide margin for bad acquisitions or a prolonged drop in sales [though the significant cash position provides adequate protection]. Loss of longtime CEO Fred Adams. The new CEO may have some crazy plans in the back pocket. Organic growth outside of the specialty eggs is only through acquisitions. These acquisitions may turn ugly OR CALM may have to issue more shares to pay for these acquisitions. This is my biggest concern and risk. The company has traditionally supported a low P/E even in good S&P years of around 10-13. It is possible that CALM sits in the low 30s for several years and a 1-2% yield if growth in specialty sales or acquisitions ceases.
My theory of CALM in 2015: Worst Case: Major recall, or Oprah crusade against eggs, I see the company going to the low 20s, then rising back to the low 30s given the strong balance sheet.
Best case: CALM would have expanded specialty to almost 1/3 of sales. EPS would have risen to $4.8 with a P/E of 10-12=$48-72. I predict 2015 CALM in the mid-$40s as I factor in the flaky industry. Perfect 5-10% EPS growth is unlikely in this industry.
For the near future, the grain prices have just risen on CALM, if the past holds, this will result in higher margins. This QTR should be a strong one, followed by the traditionally weaker late spring qtr. Best time to buy would be now, or wait until the bad qtr in May.
Thoughts?
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