Dec 28 - Put Some of Your Eggs in CALM's Basket

Blowout Sales and Earning Quarter for Cal-Maine Foods, Inc. (CALM)


Cal-Maine Foods, Inc (NASDAQ: CALM, $27.32) announced their fiscal 2Q 2008 earnings on Thursday evening, up huge - over 500%. The stock responded today with a 5.7% gain on ten times its normal daily volume.


Cal-Maine Foods Inc. (CALM) is the largest US supplier of eggs, and the stock has been a recent strong performer. The stock closed today at $27.32 a share, at the lower end of its trading range today that topped out at $31.45 early in the trading session. Still, the stock was up $1.47 from Thursday's close - a gain of 5.7% for the day. There are several reasons I think this is only the start of a larger bull run in the stock.

Today's big stock move in huge volume was all about earnings, and a potential short squeeze. Back in 2004, short sellers made money betting against CALM, but this time I think they are going to be wrong. Although the company is facing pricing pressures from feed corn increasing costs, the price of eggs has been healthy and the company announced they expect this to continue into 2008, beefing up their revenues substantially.

Thursday the company announced revenues of $223.7 million vs. $137.7 million in the same quarter a year ago, an increase of 62%. Earnings increased to $40.2 million ($1.70 per share) from $6.4 million ($0.27 per share), an increase of 528% from a year-earlier results.

Some statements from the chairman and CEO Fred Adams, Jr. in their announcement:

"These results reflect the favorable market conditions, with egg prices reaching record levels during the quarter .... All of our operations performed well during the period... demand for fresh eggs was strong for both the retail and food service markets, as well as demand for eggs used for liquid, frozen and dried egg products. The export markets also have been very strong this year, we expect Europe, the U.K., Japan and the Middle East to be good markets for eggs in 2008.

"Looking ahead, our feed costs remain high, ... with the high demand for corn for ethanol use... However, the egg industry and USDA predict that egg production will be similar to 2007 levels, and this should support profitable egg prices for the year ahead. "

Gross margins for the quarter increased dramatically to 34% from 18%. If Adams is correct and egg prices remain healthy, the two quarters leading up to and including the Easter season should be very profitable and well ahead of last year's earnings numbers.

And Adams has lots of good reasons to make sure the company performs well. He and other insiders own 39% of the stock. This also reduces the number of shares in the daily float dramatically. Taking this into account means there is only 13 million shares in the available float - and short sellers have sold a whopping 50% of this float short, or 6.5 million shares. Even if there was some short covering in today's action, that leaves a lot of room left for a short squeeze on the remaining short holders. Those who were betting on the price pressure of rising feed costs are not going to be happy about the quarter earnings and management's forecast of similar results. Short positions are going to need to be covered in the coming days, creating an even more bullish price action.

The November USDA egg report showed a lower than expected increase in hatching flocks, which has driven the price of eggs up in recent months. Because egg producers have more control over egg volumes than meat producers, and because of the continued consolidation in egg producers, there is good support in the near-term for egg prices. CALM has been one of the main reasons: they have bought many independent suppliers over the last decade and are now the largest US egg producers supplying 29 states. The USDA does predict a slight increase in U.S. egg supply over the next year.


Fundamental Buying Reasons for Cal-Maine Foods:

1. Huge increase in revenues and earnings, due primarily to the current egg pricing in the USA, which the industry and the USDA are forecasting to remain at similar levels for most of 2008.
2. Extremely large short interest in the stock - forcing a large volume of purchases of the stock due to the expectations of weaker earnings which have now been blown away.
3. Large and stable volume of stock held closely by the CEO and insiders, giving more floor to the stock price.
4. Increasing demand for exportation of eggs - strengthened by the weak U.S. dollar.
5. Operational performance has been good, with large increase in gross margins.
6. Likely return of many short sellers from a holiday week - who will now be buying back stock - will make next week a timely entry point into the stock.

Although as with everything in life your investment portfolio should not put all your eggs into one basket, this is a stock that you can be looking at purchasing at the start of trading next week.