Eggland's Best: Value at Cal-Maine?

06/28/2016 7:00 am EST

Focus: STOCKS

Peter Mantas

CIO, Logos LP

Our latest featured value idea has been a short-sellers dream lately: the stock is down nearly 26% over the past year and short interest is at an all-time high, argues Peter Mantas, value investor and money manager at Logos, LP.

The catalyst for this decline at Cal-Maine Foods (CALM), in a nutshell, is the expected price decline of eggs going into late 2016 as egg prices peaked earlier in the year due to the Avian flu creating a supply shortage.

Cal-Maine is the largest shell egg producer in the United States; the firm is known for its Eggland’s Best brand.

Is this the beginning of the end for CALM, or is this an excellent opportunity for buyers? We believe it is the latter.

It is no secret that the egg market is an extremely cyclical business; however, the company has had a history of creating value over very long periods of time despite volatility.

CALM is a solid operator of capital and has a history of creating value: the company has very little debt while providing investors with an ROE north of 28%. Operating margins are at a healthy 14% and the company has a FCF/Sales of over 15%.

Despite the volatility of egg prices, CALM has an acquisition based strategy and revenue has increased nearly five fold over the past ten years with book value increasing nearly 6x over that same time span.

Over its latest quarter, the company grew operating income by over 19%, revenue by nearly 3% while maintaining a P/E ratio of under 6 (which, quite frankly, does not make much sense).

Free cash flow (FCF) over the trailing twelve months is at an all-time high, price to sales is at a paltry 1.0, and it has an extremely healthy payout ratio of 32%.

Over 1/3 of the company’s market cap is in working capital, which is means that if this price decline continues, the company is looking at a Ben Graham-style valuation unseen by a consumer non-cyclical company.

Although we do not play in the futures markets, we do believe that CALM provides attractive value and history suggests that egg fundamentals will eventually stabilize given long-term demand trends for eggs.

For investors who are patient and can stomach the wild swings, there are very few names that offer this level of value run by quality management.

We’re expecting CALM price to fall near the $35, which would be an extremely attractive opportunity for the long-term investor.

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By Peter Mantas, Money Manager at Logos, LP

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