Friday, May 1, 2009

The Moat of Eggs

Is there any money to be made on widespread food products? I tend to think so and I have one precise example; eggs. Until lately, I had no clue about the precise economics of the egg business, until my stock screening came out with a company that has managed to get very profitable by having a very dominant position in the US market.

If i tell you there is an company, specialized in the production and distribution of eggs, that has over a 500 million dollars market capitalization, a staggering 34% average return on equity for the last 5 years and an average 8% profit margin over the same period that ensures a cushion for their profits in the precise case of difficult economic conditions.

As it is stated in their 2008 annual report, Cal-Maine Foods Inc. is primarily engaged in the production, grading, packing and sale of fresh shell eggs. The Company, which is headquartered in Jackson, Mississippi, currently is the largest producer and distributor of fresh shell eggs in the United States and sells the majority of its shell eggs in approximately 28 states across the south-western, south-eastern, mid-western and mid-Atlantic regions of the United States. The company finished fiscal 2008 with sales of approximately 678 million dozen shell eggs, representing approximately 15.8 percent of domestic shell egg consumption in the United States!

Their current P/E ratio of 5.95 led me to think that their stock is currently undervalued, mostly considering that that their net income has been lower for the last quarters. I think this could be a good buy for the long run. It is my opinion that not many investors are yet aware of the underlying value of Cal-Maine Foods, which will allow value investors to pick it up the common stock at a very fair price.

Full disclosure: the author has no position in CALM.

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