2. COMPANY OVERVIEW
• Cal-Maine is the largest producer and marketer of shell eggs in US.
• Founded in 1957. Went public in 1996
• 23% market share in USA
• Integrated Operations – Production, grading, marketing & distribution
• Presence in south-western, south-eastern, mid-western and mid-Atlantic
regions of USA
• Growing through acquisitions as well overall increase in egg demand with
increase in population
Products
• Non-specialty eggs
• Specialty eggs
• Egg Products
Brands
Source – 10k report
https://www.sec.gov/Archives/edgar/data/16160/000001616016000061/calm-20160528x10k.htm
4. SWOT ANALYSIS
Strengths
1) High Capacity
2) Fully Integrated Facilities
3) Increasing Specialty Eggs
Share
Weakness
1) No control over selling price
2) Top 10 customers – 70.6%
of sales
3) High competition
Opportunities
1) Increasing capacity through
acquisitions to control supply
2) Increasing number of
customers
Threats
1) Avian Flu
2) Excess supply
3) Loss of major customer
5. FIVE FORCES ANALYSIS
Competitive
Rivalry
MEDIUM
Threat of
New
Entrants
HIGH
Bargaining
Power of
Customers
HIGH
Threat of
Substitute
Products
MODERATE
Bargaining
Power of
Suppliers
LOW
• 56 producers have a flock of more than 1 million
• No price rivalry as controlled through an index
• Top 3 producers have 40-45% market share
Competitive Rivalry
Threat of New Entrants
• No particularly high barrier for entry
• Players exist with low capacities
Threat of Substitute Products
• People can go to other protein diets
• Favorable/Unfavorable reports on eggs can influence
demand
Bargaining Power of Suppliers
• Prices of Soybean & Corn controlled through index
• Depends on crop production
Bargaining Power of Suppliers
• Prices controlled through index
6. MACROECONOMIC OVERVIEW
• The revenues of company grow along with increase in US populations
Source – Ycharts for population (https://ycharts.com/indicators/us_population)
10k reports for revenues (https://www.sec.gov/cgi-bin/browse-edgar?CIK=CALM&owner=exclude&action=getcompany)
7. MACROECONOMIC OVERVIEW
• Net income heavily depends on the average egg price for the company
AVERAGE EGG PRICES (Specialty + Non-Specialty)
0.751
0.93
1.377
1.209
1.124 1.132
1.21
1.35
1.43
1.53
1.79
0.6
0.8
1
1.2
1.4
1.6
1.8
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
NET INCOME
$(1.0)
$36.7
$151.8
$79.5 $67.8 $60.9
$89.8
$50.4
$109.1
$161.3
$316.0
$(50.0)
$-
$50.0
$100.0
$150.0
$200.0
$250.0
$300.0
$350.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source – 10k reports (https://www.sec.gov/cgi-bin/browse-edgar?CIK=CALM&owner=exclude&action=getcompany)
8. VALUATION (DCF METHOD)
Discount Rate Calculation
Remarks
Cost of equity
Risk-free rate 2.41% 10 year t-bill, Source: Yahoo! Finance (as of 2/10/17)
Beta 0.79 Calculated, 5 year monthly to S&P500 (as of 2/1/17)
Market risk premium 6.84% 20yr Historical Market Risk Premium according Duff & Phelps
CAPM Cost of equity 5.90%
Hist. Ann. RoR to shareholders 21.11% Annualized 5 year return to shareholders (as of 2/1/17)
Cost of equity 15.03% 40% CAPM + 60% Historical Return
weight 81.21%
Cost of debt 3.99% Averge rate of outstanding debt
weight 18.79%
WACC 12.95%
Business Risk Premium 1.20%
Discount Rate 14.15%
Weighted average cost of capital
• Higher weightage given to historical returns as the company is volatile and highly
dependent on egg and feed prices, therefore investors should expect higher returns.
9. VALUATION (DCF METHOD)
Revenue and COGS Forecasting
Income Statement ($ Million) Year Ending May 31, Forecast Forecast
2015 2016 2017 2018 2019 2020 2021 Factor Assumptions
Population of USA 321.7 324.12 326.71 329.33 331.96 334.62 337.29 0.8% Based on historical forecasts
Egg eating population in USA 210.90 217.27 222.16 223.94 225.73 227.54 229.36 68.0% Based on historical forecasts
Demand for eggs (Million Dozen) 4622.17 4580.87 4572.89 4702.78 4740.41 4778.33 4816.56
Demand / person 263 253 247.00 252.00 252.00 252.00 252.00 252.00 Constant number of 252
Cal-Maine Share (million Dozen) 1063.1 1053.6 1028.90 1081.64 1114.00 1122.91 1155.97
Produced by Cal Maine 798.8 819.3 860.27 868.87 886.25 895.11 904.06
Speciality Eggs %age 0.23 0.23 0.23 0.23 0.24
Specialty Eggs Numbers 0.77 0.77 0.77 0.77 0.77
Market Share 23.00% 23.00% 22.50% 23.00% 23.50% 23.50% 24.00%
Price of Eggs/dozen (USD) 1.53 1.79 0.7 1.25 1.25 1.25 1.25 Avg Price of Egg Considered with no abnormality
Price of Speciality Eggs/dozen (USD) 2 2.1 2.1 2.2 2.2
Estimated Sales 1626.54 1885.94
Cost of Ingouse Eggs/Dozen 0.705 0.693 0.706 0.710 0.717 0.724 0.732
Cost of Eggs Purchased/Dozen 1.720 1.01 1.13 1.21 1.23 1.29
Production, packing, process & Misc ($ mn) 220 230 240 250 250
Sales 1576.1 1908.7 1022.5 1560.8 1608.4 1649.0 1703.0
Cost of Sales 1139.7 1216.0 997.7 1087.3 1151.1 1178.5 1236.3
Gross Operating Income 436.4 692.7 24.9 473.4 457.3 470.5 466.7
10. VALUATION (DCF METHOD)
Estimate of Stock Price
Present Value of Free Cash Flows Forecast
2016 2017 2018 2019 2020 2021 2021
1 2 3 4 5 5
Free Cash Flow & Terminal Value (103.38) 192.21 180.51 199.44 196.71 1,816.34
Present Value ($90.6) $147.5 $121.3 $117.4 $101.5 $937.0
Enterprise Value 1,334.2$
- Net Outstanding Debt 25.6
- Preferred Stock -
- Non Controlling Interest -
Implied Equity Value 1,308.60$
Stock Price 26.96$
Long-term Growth Rate of 3% considered
12. ANALYSIS
Even though the price derived through DCF is approx. $27 and the current stock price is at
approx. $37, it does not mean that Cal-Maine is a sell for people having it in their
portfolio.
Buying a stock is more about buying a business. Currently the earnings of the company
have been hit by a decade low wholesale egg prices but overall the company is doing
good and is in a simple business of producing and selling eggs. The current stock price
calculations don’t take into account the acquisitions which company will make in the
future to increase its capacity but takes into account the average increase the company
makes every year. The management of the company has been doing a great job of
expanding its business with time and has been consistent in its philosophy of running the
business. With increase in capacity and increasing their market share, their moat is
increasing with time. It is a low-risk high-uncertainty business since eggs will always be
consumed but uncertainty is on account of the egg & feed prices. These are the kind of
businesses one should invest in when there prices are low.
Mr. Market has currently not priced the stock super low but it is a stock that should be
held if its in the portfolio and if the stock price goes below $27, then it is a sure shot buy.
Overall, I believe that the company is long-term growth stock since other competitors will
not be able to build up capacities to challenge Cal-Maine at least at a fast pace.
