Cal-Maine Foods, Inc. (symbol CALM) is one of those stodgy food companies that never seem to excite much enthusiasm by the market. For Cal-Maine, the principal product is eggs. In the last week, however, Cal-Maine has seen its price decline by about 10% after a disappointing earnings report on New Year's Eve. It is that very earnings report that carries with it the reason why the stock has become a compelling buy. Let me explain:
For the quarter that ended on November 30th, Cal-Maine beat the estimates for revenue with sales of $329 million. This was an increase of 13% YOY. Earnings, however, missed by estimates by around 30 cents coming in at 60 cents per share compared to 97 cents the year before. So far, it sure doesn't sound like a buying opportunity, but then we get to the reason for the earnings miss. According to the company, the drought over the summer sent the price soaring for the feed needed for the millions of chickens kept by Cal-Maine to produce eggs. The two principal components in that feed are corn and soybean meal, and that is the reason to buy. The price for both of these commodities hit highs at the beginning of the last quarter. While the price for corn declined from 800 to 750 during the quarter, it has since dropped to 685 at the moment. For soybean meal, the drop was greater, going from about 550 to 450 last quarter and now hitting 409. For both commodities, futures prices for the next year show consistent declines.
What all this means is that if Cal-Maine just keeps its revenues constant, its earnings will rise substantially as the price for its chicken feed falls. The very problem that led to the earnings miss will reverse and put the stock back up to higher earnings levels.
Now don't misunderstand; Cal-Maine is not about to double or become some sort of high flyer. It will, however, return to being a high dividend paying stock with a relatively secure market and good earnings. It ought to be move back up the 10% or so that it lost after the last earnings report. Couple that 10% rise with the dividend to be paid over the next six months, and the annualized profits for purchasing the stock should be in the 25% range. For a food company, that is a great result.
DISCLOSURE: I am long Cal-Maine. Note also that my projections as to the future prices for the commodities involved are just that: projections. We all know that things change, so before you invest, check out what I say and decide for yourself.
For the quarter that ended on November 30th, Cal-Maine beat the estimates for revenue with sales of $329 million. This was an increase of 13% YOY. Earnings, however, missed by estimates by around 30 cents coming in at 60 cents per share compared to 97 cents the year before. So far, it sure doesn't sound like a buying opportunity, but then we get to the reason for the earnings miss. According to the company, the drought over the summer sent the price soaring for the feed needed for the millions of chickens kept by Cal-Maine to produce eggs. The two principal components in that feed are corn and soybean meal, and that is the reason to buy. The price for both of these commodities hit highs at the beginning of the last quarter. While the price for corn declined from 800 to 750 during the quarter, it has since dropped to 685 at the moment. For soybean meal, the drop was greater, going from about 550 to 450 last quarter and now hitting 409. For both commodities, futures prices for the next year show consistent declines.
What all this means is that if Cal-Maine just keeps its revenues constant, its earnings will rise substantially as the price for its chicken feed falls. The very problem that led to the earnings miss will reverse and put the stock back up to higher earnings levels.
Now don't misunderstand; Cal-Maine is not about to double or become some sort of high flyer. It will, however, return to being a high dividend paying stock with a relatively secure market and good earnings. It ought to be move back up the 10% or so that it lost after the last earnings report. Couple that 10% rise with the dividend to be paid over the next six months, and the annualized profits for purchasing the stock should be in the 25% range. For a food company, that is a great result.
DISCLOSURE: I am long Cal-Maine. Note also that my projections as to the future prices for the commodities involved are just that: projections. We all know that things change, so before you invest, check out what I say and decide for yourself.
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