Regular Eggs as a Unique Product of Growth: Cal-Maine Foods or Simple Investments

Inflation hit the grocery sector hard in 2022, but no commodity has skyrocketed in price as much as eggs. According to the latest U.S. CPI numbers, their prices rose by 11.1% (MoM) in December and by 60% YoY. It’s now gotten to the point where U.S. CBP has seen fit to remind people that importing eggs from Mexico is illegal.

?

In a nutshell

??????If we ignore non-essential factors, such as disruptions in supply chains, military escalation, etc., the main reason for such a sharp increase in the prices of groceries is the deadly bird flu outbreak. According to the Animal and Plant Health Inspection Service, it killed 52.7?million birds in the U.S. last year alone. For that reason, supply can’t keep pace with demand. This same problem has carried over into 2023: poultry associations mostly talk about bird flu as the main risk. It’s the biggest problem as long as eggs are mostly produced by large farms with hundreds of thousands of birds, where disaster can happen.

??????Major players in the poultry market have more ways to influence pricing and control costs through purchasing power. But if we consider the increase in the price of eggs from the perspective of small farms, it comes down to four points: 1) feed costs (~+26% in a year); 2) electricity costs (+~30%); 3) carton packaging costs (~45%); 4) enrichment to increase nutritional value.

??????The scenario, where prices become too high, and people stop buying eggs, is practically impossible. Here are the reasons: 1) every producer has a solid base of customers who—even at high prices—feel the difference between high-quality eggs and regular ones; 2) the production process is the same (it takes about 20–22 weeks for a day-old chick to become a chicken and lay eggs); 3) apart from politics, global inflation is here, and eggs remain a cheap source of protein; 4) supply is limited due to poultry depopulation caused by diseases.

?

A good example backed by numbers

In this case, a public small-cap company Cal-Maine Foods #CALM, a large egg producer, looks intriguing. The #CALM stocks grew by 30% in a year.

In Q2 of FY2023, #CALM delivered stunning results thanks to a record average selling price of regular eggs (YoY).

?????Net sales: $801.7?million (+110%)

?????Average selling price of all eggs per dozen: $2.71 (+98%)

?????Average selling price of regular eggs per dozen: $2.88 (+150%)

?????Net income: $198.6?million or EPS: $4.07 (Note: compared to $1.17?million or $0.02 EPS!)

?????Gross profit margin: 39.6%

?????Cash dividend of $1.35 per share

?

Business details

à????Production costs per dozen went up by 22% or $0.193 ? due to skyrocketed feed costs.

à????Feed costs per dozen went up by 29.5% or $0.685, ? since corn and soybean supply is limited, as proved by low stock/supply ratios associated with production shortfalls, crop yields, supply disruptions, and the way the war impacts export markets.

à????Expectations are the same this year: ? corn and soybeans prices will still be under pressure, and further market volatility will affect feed prices.

?

P.S. I deliberately avoid reflecting on the popular topic of artificial products, e.g., “why Bill Gates invests in chicken-free eggs.” I’m sure it’s a manipulative way to remove “natural” things from the reasonable equation of our life, but natural resources are enough for everyone. And people need them: the numbers speak for themselves.