Several readers have been asking what Tony Sagami’s “Superfood” pitch is all about — this ad started running on Friday, I believe, and it’s a pitch for the Yield Shark newsletter, edited by Sagami and published by Mauldin Economics.
And it is blissfully brief in comparison to the many “presentations” we suffer through each day… so I’m happy to turn the hinting into some answers for you.
What’s the company that Sagami says he just “vetted” for his subscribers?
Here are some hints for you:
“In 1957 [its founder] purchased a used truck and delivered feed in rural areas around Mississippi’s capitol city, Jackson—the first step toward starting an enterprise that is today the largest of its kind in America….
“The company sells its animal-based superfood in about 29 states, mostly in the eastern half of the United States, and its brands are household names.”
And he breaks down his “four reasons” why you should buy this stock… naturally, those “reasons” give us a few more clues, here are some excerpts that we’ll feed into the Thinkolator:
“Reason #1: Profits. In 2015, the company had a 23% market share… grown revenues over the last five years at an amazing 11.6% CAGR….
“Reason #2: Healthy Food…. a major American health organization spread the word that consuming this food was detrimental to your health. However, in 2000, they changed their tune and admitted that in contrast to their former statements, this animal-based delicacy is actually not unhealthy at all.
“Reason #3: Stock at a Discount…. the Wall Street crowd is wary about the cause of its 2015 profits and expects a downhill slide for this year.
“But it’s ignoring a major contributing factor that, I believe, will make the company look just as good in 2016 as it did last year.
“Reason #4: Decent Dividend. One thing I should tell you: This company lives by the principle, ‘No profits, no dividend.’
“Normally, that would be a red flag for me, but I discovered that the founder and his family own one-third of the outstanding shares—a virtual guarantee that their interests are aligned with ours.
“Right now, the company pays a decent 3.2% dividend per year.”
OK, so we can narrow this down with some actual brainpan work… the “healthy food” bit is clearly about eggs, which we were told were horrible in the 1980s and 90s but then given the green light to eat in 2000 and to perhaps eat more of in 2010 as guidelines changed, particularly as the link between dietary cholesterol that you eat (egg yolks are almost entirely cholesterol) and cholesterol in your bloodstream became much more tenuous.
And lately we’ve been told that pastured chickens who eat more than just grain are especially good egg-makers, since then you’re likely to get those lovely omega-3 fats in there as well (as with grass-fed beef). So that gets us a bit further away from the “cheap superfood” label, since batteries of factory farmed-chickens make far cheaper eggs, but I guess that’s the way of all things.
Those same guidelines have recently also been telling us that it’s safe to drink more coffee, and that we should maybe even drink a little more… which is more exciting for me than eggs. But we’ll leave that aside for the moment.
It’s the stock you’re interested in though, yes? So who is it? This is, sez the Thinkolator, Cal-Maine Foods (CALM)… and it is indeed a colossus in the egg world. I don’t think I would ever imagine that you’d have a $2.5 billion egg farmer, but that’s essentially what Cal-Maine is… they sold about 12 billion eggs last year (or a billion dozen, since they think and report in dozens) and are by far the largest company with (according to them) 23% of the shelled egg market. The top ten egg producers produced 47% of the eggs in the US, so that would mean CALM is as big as the next nine producers put together… and they say they’re looking for more acquisitions as the industry continues to consolidate. They are strongest in the South, Midwest, and MidAtlantic, and they sell through most of the huge retail stores in those states under both brands they own (like Farmhouse and 4-Grain) and cooperative brands of which they are a part (like Land-O-Lakes and Egg-Lands Best).
I don’t know if there’s much brand loyalty in eggs, but there is a growing interest in “specialty” eggs — about 20% of CALM’s eggs are higher-end eggs, including cage-free, brown eggs, omega-3 eggs and the like — and pricing for those is both higher and firmer, and less likely to fluctuate with local supply and demand (so last year 20% of their eggs were in those “specialty” areas, but that accounted for more than 27% of sales… I don’t know how the input costs differ, or what the margin might be, but they seem encouraged by the growth of specialty eggs).
And yes, the company was started by a small farmer in 1957 — that was Fred Adams, who within five or six years of starting an egg business had built the world’s largest egg farm in Edwards, MS. His company was called Adams Foods at the time, but took on the Cal-Maine name when it merged with Dairy Fresh Products Company of California and Maine Egg Farms of Lewiston in 1969 and became a nearly nationwide producer. They went public in 1996, and have made lots of acquisitions over the past couple decades.
Fundamental performance for the past decade has been pretty strong — volume and sales have risen pretty steadily (with a slight plateau in 2008), though the average feed costs have about doubled during that time and the price of eggs has sometimes been volatile. Right now, they’re recovering from losing more than 10% of their flock in the Avian Flu outbreak last Summer in the midwest, an event which also helped to drive up egg prices while feed prices have been falling and improving profits, so perhaps the “one time” nature of that has something to do with the earnings pessimism — and there is indeed pessimism among the analyst cohort.
And there’s also the regulatory disruption of the new (as of last year) California egg rules, which require much more space for chickens and have led to a national bidding war for “California Approved” eggs — all eggs sold in California are now required to come from chickens who have approximately twice as much space available to them as in the past, which immediately had the effect of reducing egg production in the state but which is also causing more investment into “California compliant” facilities, including by Cal-Maine.
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CALM is currently expected to earn $7.37 a share in their current fiscal year (which ends in May), which is down from the prior estimate of $9+ for this year but way, way higher than the previous year’s $3.33, and those same analysts are expecting earnings to drop to $4.99 in the next fiscal year. That’s a LOT of earnings volatility…. but it’s also a much higher earnings number than CALM investors saw in the recent past, the earnings per share for the previous five years averaged about $2. So from that perspective, $4.99 is still pretty fantastic long-term growth, and a price of $52 means you’re paying not much more than 10 times earnings to own the company. That’s not bad, as long as they don’t flop back down to earning $2 a share in a few years. Based on trailing earnings, the PE is right around 7 — that’s fairly close to where CALM has bottomed out in the past a few times, though it has occasionally dipped below that to hit a PE of 5 or so. The balance sheet doesn’t look like a concern, they’re investing in expansion and could make an acquisition at any time, but as of now they have a net cash position.
When it comes to the “regular” commodity egg market, growth is pretty slow — CALM says they sold about 0.5% more eggs last year than in the year before — but growth in organic and cage-free eggs is substantial, in the 20%+ neighborhood, so that’s where a lot of the investment is going and where they expect to see earnings growth, including from some new large joint venture facilities they’re building with other large producers. The big surge in earnings over the past year was fueled by dramatic revenue growth, with sales rising by 30% — and the expectation is that sales will drop by 10% next year, presumably because the impact of Avian flu is waning (egg prices are already significantly below where they were a few months ago), which is presumably why analysts expect that earnings will be so much weaker than they were in the past couple of peak quarters.
The stock does indeed pay a decent dividend right now — the trailing payout is $2.40 a share, so that’s approaching a 5% yield… but, as Sagami notes, there’s no consistency or growth expected — the dividend policy is that they will pay a dividend that equals one third of net income per quarter, so if the estimate about next year is right the dividend would be in the $1.65 range, which is indeed a yield of about 3.2% at today’s share price. The family does own more than 30% of the shares (another 10% is owned by other insiders and the employee stock ownership plan, so the freely trading float is pretty small… and the short position is huge, with more than half of the float sold short.
That huge short position might well make the stock quite volatile — it would take about about 25 days of average trading to buy back those shorts, so if the shorts have to cover in a hurry because of strong price performance the stock could pop up dramatically. Or, of course, the shorts could be right and the shares could fall further — either way, the next big “news” point is Monday the 28th (a week from today), when they’re releasing their third quarter results. The average estimate for that earnings number is $1.05, but the range of guesses is quite wide — perhaps some of the pessimism comes from the fact that they’ve “missed” on their quarterly earnings for four quarters in a row.
In a case like this, with a dividend, large insider ownership, and a huge short position, I’d be more inclined to bet on the long side than the short side — particularly because there’s some organic volume growth aside from the impact of rising or falling egg prices. I’m not going to buy the stock, but that’s where my sentiment sits at the moment — if there was insider buying, that might be enough to push me over the edge (but there ain’t, of course). Because I don’t really know much about the fluctuations of the egg market other than the few updates I read today, I would probably wait until earnings to see how things are trending, and to see what the company says about the coming year… though you do, of course, take some risk that you’ll miss a big “short squeeze” pop if they have a surprisingly great quarter.
If analysts are right about CALM earning about $5 a share next year, then the downside risk is probably a drop of about 50% to $25 or so if it trades down to about 5X earnings — that’s around where the valuation has bottomed out a few times (most recently in 2008/2009). There aren’t really any comparable “pure play” egg companies — the other big US egg producers are family owned — so if you want to “bet on eggs” in the stock market, either up or down, Cal-Maine will always be the name you hear… which means that potential egg-impacting events like dietary guideline changes, demand for organic products, avian flu, or regulatory changes for laying hens will often play out in CALM’s share price as traders try to game the impact.
Sagami says his report is being published tomorrow — I don’t imagine his readership is large enough to have a big impact on a $2.5 billion stock that trades ~$50 million worth of shares a day, but you never know.
That’s all I’ve got for you — if you’ve an opinion about the incredible, edible egg, or thoughts on Cal-Maine, feel free to crack ’em open with a comment below. Thanks for reading!