Cal-Maine Foods, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Cal-Maine Foods, Inc. is the largest producer and distributor of fresh shell eggs in the United States, engaged in the production, grading, packaging, marketing, and distribution of shell eggs.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Cal-Maine operates in a commodity market, where brand recognition is generally low. However, it has built a significant presence in specialty eggs, where brands are more popular. In recent years the company has significantly increased its overall market share.

Business Overview:

Cal-Maine Foods operates primarily in the production, grading, packaging, marketing, and distribution of shell eggs. The company is the largest producer and distributor of fresh shell eggs in the United States. They market shell eggs under various brands, including private-label and branded eggs, through a network of processing and distribution facilities. Their customers include national retailers, regional distributors, foodservice providers and governmental entities.

Revenue Distribution: Cal-Maine’s revenue streams can be broadly categorized into:

  1. Conventional Eggs: Standard, commodity-like white and brown eggs sold in cartons. These eggs make up a majority of the sales volume and have lower margins.
  2. Specialty Eggs: Enhanced-nutrition eggs (like cage-free, organic, and pasture-raised eggs) produced with specified feed or management processes. These command higher prices and offer better margins.
  3. Egg Products: Liquid eggs, egg whites, and other further processed products, which typically target food manufacturers and processors.

Specialty eggs make up for 35% of sales volume in the latest quarter.

Industry Trends: The egg industry is characterized by the following trends:

  • Consolidation: The industry has seen consolidation in both the production and distribution segments. Larger producers are becoming increasingly dominant.
  • Shifting Consumer Preferences: Consumers are showing a growing preference for cage-free, organic, and other specialty eggs, leading to increased demand and higher margins in this segment.
  • Cost Volatility: Input costs, particularly feed (mainly corn and soybean meal), are subject to significant volatility due to weather conditions, commodity markets, and international events. These costs can have a significant impact on profit margins.
  • Health Concerns and Animal Welfare: There is increasing focus from consumers and regulatory bodies for animal welfare and food safety standards. This has led to higher investment in technologies related to egg production.

Competitive Landscape: The egg industry is characterized by a fragmented competitive landscape. Cal-Maine is the largest player by a considerable distance, followed by a number of regional players and co-ops. The industry is marked by:

  • Price Competition: Shell eggs, particularly conventional ones, are commodities, where price is often the most important factor for consumers.
  • Consolidation: Recent trends have indicated ongoing consolidation as the largest producers seek scale advantages.
  • Brand Differentiation: Companies selling specialty eggs have an ability to leverage pricing power due to brand and differentiation.

What Makes Cal-Maine Different:

  • Scale: They are the largest producer and distributor of shell eggs in the US which allows for large scale efficiencies.
  • Focus on Efficiency: Cal-Maine focuses on operating efficiencies and reducing costs, allowing it to remain competitive even in low margin commodity environments.
  • Geographic Reach: Cal-Maine has an extensive distribution network across much of the US.
  • Specialty Eggs: The company is successfully pivoting toward specialty eggs and away from regular production.
  • Acquisitions: Cal-Maine has a history of growing through acquisition, which has helped it expand its geographical reach and production capacity.

Financials:

  • Margins:
    • Gross profit margins of 23% for the first 39 weeks of 2023.
    • Operating margin of 16.1% for the first 39 weeks of 2023.
    • Net profit margin of 9.6% for the first 39 weeks of 2023.
  • Revenues: The company generated $2.03 billion in revenues in the fiscal year 2022. For the first 39 weeks of 2023, the revenues were at 1.96 billion.
  • Capital Structure: The company has relatively low debt levels, with debt at 12.5% of total capital (as of November 2022).

Moat Analysis:

  • Sources of Moat:
    • Scale: Cal-Maine benefits from economies of scale being the largest producer in the US, which gives it advantage over smaller producers in terms of pricing and operation efficiency. They have significant market share which is very beneficial.
    • Niche markets The company does have a significant presence in specialty eggs which allows for higher margin.
    • Distribution Network: Cal-Maine has a well-established distribution network which can be a barrier to entry for new companies and make it hard for smaller ones to compete.
    • Some Brand Strength: Cal-Maine has some brand recognition in the specialty egg market.
  • Moat Rating: 3 / 5

Cal-Maine has a narrow moat. While the size, scale, and a distribution network provides some advantages in traditional commodity eggs, the company’s pivot to specialty eggs has given it slightly more pricing power in this market segment.

Risks to the Moat:

  • Volatility of input costs: The price of animal feed is subject to commodity price fluctuations and could significantly impact profitability. The company is at the whim of the market for pricing and availability of feed.
  • Competition: Increased competition in the egg industry and the shift towards more sustainable farming practices could put pressure on the company’s margins and market share.
  • Over reliance on commodity eggs: While specialty eggs have been an increasing focus, the company is still heavily reliant on commodity eggs, which makes them vulnerable to fluctuations in commodity prices.
  • Regulatory and Environment Risks: Environmental regulations can lead to increase in operating costs due to the implementation of new standards. Also, risks to the egg supply can be exposed to disease outbreaks.

Business Resilience:

  • Cal-Maine is a large company operating in a necessity-based industry. While the market is cyclical, demand for eggs doesn’t change much even in recessions.
  • The company’s growing focus on specialty eggs also provides additional profitability which reduces the impact of volatility in standard egg prices.
  • Relatively low debt level makes Cal-Maine resistant to bankruptcy even during hard times.

Understandability: 2 / 5

The core business of Cal-Maine is fairly easy to understand. However, the details of the business, particularly the accounting, cost structures, and the economics of commodity versus specialty eggs, combined with the financial instruments and derivatives they might or might not use make it somewhat complicated to analyze without a deep dive.

Balance Sheet Health: 4 / 5

  • Debt Levels: With debt only making about 12.5% of the total capital in 2022, their balance sheet is relatively clean and has the ability to service the debt.
  • Cash: They have significant excess cash which they might choose to deploy in various methods including expanding current operations and acquiring new businesses.
  • Capital allocation: The company seems conservative on capital deployment as it doesn’t pay a dividend to shareholders and rather reinvests most of the earnings in capital expenditure. Although, they are open to returning capital to shareholders via dividends and share buybacks when appropriate.

Recent Concerns/Controversies & Problems Faced

  • The company has received a letter from the SEC stating they are being investigated for potentially inflating prices.
  • Prices for eggs were significantly higher in 2022-2023 due to an outbreak of avian flu. While this led to high profits, it also drew a lot of criticism from the government and led to the SEC investigation.
  • The company’s management in recent earnings calls has stated that they do not see price spikes for eggs continuing, and they are expecting lower prices moving forward.
  • While sales were strong, net income has fallen in recent quarter because of decreasing egg price and increasing costs.
  • Demand for eggs is higher than it was before the crisis which should bode well for egg producers. However, companies with significant debts might not withstand price fluctuations in their favor.
  • Management also said they are prepared to see reduced profits.