HOLDING RECOMMENDATION MEMORANDUM
TO:RCMP Client
FROM: Ryan Seong, Anthony Sorrentino
DATE: December 6, 2016
SUBJECT: Cal-Maine Foods, Inc. Recommendation (Hold)
Current Price$39.75 / P/E
13.9 / Dividend (Yield)
$1.76 (4.35%) / Market Cap
$1.98B / 52 Week Range
$35.65 - $55.43
Company Overview
Cal-Maine Foods, Inc. (Cal-Maine) was founded in 1957 andis the largest producer of shell eggs in the United States. The company’s fully integrated operations include the production, grading, packaging, marketing and distribution of shell eggs. Cal-Maine produces generic non-specialty eggs that account for ~70% of sales and specialty eggs that account for ~27% of sales. The remaining 3% of sales are comprised of secondary egg products. The company sells their specialty eggs under the brand names Egg-Land’s Best, Land O’Lakes, Farmhouse and 4-Grain.Specialty egg sales have been an area of focus for Cal-Maine as the company can charge more for specialty eggs and their prices are less cyclical. In addition, the company is focused on growth through acquisition, having completed 18 acquisitions since 1989, and will continue to pursue opportunities that arise to acquire companies in any segment of the egg production process.
Current Position
We purchased 100 shares of Cal-Maine on the 16th of December, 2015 at a market price of $47.68. Since then we have received two dividend payments amounting to $1.19 per share for a holding period return of 2.51%. In addition, at a current market price of $39.75 we have an unrealized loss of (16.6%) due to price depreciation.
Industry Overview
Cal-Maine Foods operates in the Chicken Egg Production (CEP) Industry. This industry is cyclical and highly competitive. Cal-Maine is the largest player in this industry accounting for about 23% of sales. Changing consumer preferences to include more protein in their diets and move away from red meats have been a source of growth for the CEP industry. The largest costs for companies in the CEP industry are feed costs for the chickens, which can account for 60% to 70% of sales. Feed consists of mainly corn and soybean meal, which tends to be very volatile in price due to the uncertainty of future crop yields.
Macroeconomic Outlook
The CEP industry is dependent on a number of different macroeconomic factors that can affect industry performance as a whole. Growth in the amount of chicken eggs bought is about in line with population growth, averaging about 1% to 2% per year. The price of eggs is dependent on supply and demand for any given year, and is highly unpredictable. Population growth, the price of shell eggs and the price of feed are all expected to increase moderately over the next five years, providing some optimism for Cal-Maine and other players in the CEP industry.
Valuation
We used two valuation methods for valuing Cal-Maine, a DCF model and a comparable analysis. In the DCF model we used a long-term growth rate of 3% and a discount rate of 12% that we feel accurately represents the risk of holding Cal-Maine. Forecasting a conservative increase in the price of shell eggs and chicken feed, we derive a valuation of $39.46. For the comparable analysis, we found 3 companies that were similar to Cal-Maine and used EV/EBITDA, EV/EBIT, EV/Sales and P/E multiples to achieve a price of $35.51.
Recommendation
After completing our DCF and comparable valuations, we suggest holding Cal-Maine. We believe that prices of eggs should continue to rise from their current 10-year lows. In addition, Cal-Maine has enough capital on hand and the borrowing ability to continue their acquisition strategy, which we believe will lead to increased total egg sales as Cal-Maine continues to take market share from competitors in the CEP industry.
Real Client Managed Portfolio University of Illinoi at Urbana-Champaign