Turning Eggs into Dollars

Posted by Wayne on July 22, 2008 – 1:25 pm

Somebody asked this question on TickerHound a few months ago (just as the market began to take a dive):

What are some good sectors to invest in during an economic downturn?

It’s a question I’ve thought a lot about, and have written extensively on, for the last few months.

For me, it all comes down to consumer spending patterns.  Where are people going to cut back?  Where will they continue to spend?

As this economy continues to slide and the more I begin to realize we’re far from being out of the woods, I find myself starting to cut back on my own spending here and there.

Don’t get me wrong, I’ll still treat myself to a nice glass of scotch (or two) every now and then, but those “little extras” I’ve become so accustomed to suddenly don’t seem so important. I’m really trying to force myself to take less taxi’s, spend less money on gourmet coffee, etc.  And the one thing I find myself doing more and more these days is cooking at home.

I live in New York City and not only are there amazing restaurants everywhere, but they’re usually right around the corner and open until the late hours of the night.  So it’s been very easy for me to walk down the block for my breakfast, lunch and dinner.

But I’ve begun to break that habit and it’s done wonders for my wallet.

So that got me thinking, even if we do slide into a protracted downturn, people still have to eat, right?  And since they’ll continue to buy groceries – in fact, they’re likely to buy more now that eating at home is much more economical than going out – then it raises the question: which stocks stand to benefit the most from this trend?

I pondered this question as I munched on my eggs this morning and suddenly it hit me – eggs!  Who produces eggs in this country?

I don’t know why I never thought of it before, but I guess since the product is such a staple and lacks any type of brand recognition that it goes overlooked a lot of the time.  But as I began my research I found that there was, in fact, a company producing the lion’s share of eggs in this country:

Cal-Maine Foods (Nasdaq:  CALM)

Cal-Maine produces roughly 15% of the eggs consumed in this country, and its market share is steadily growing; the company has been consolidating this space with a number of well-timed acquisitions.  Cal-Maine has also capitalized on the more health conscious consumers by investing in low-cholesterol and organic egg products which typically go for premium prices.

Cal-Maine also has a rock solid set of financials to back it up too.  Operating Margins are north of 30%, Net Profit Margins are at roughly 20% and the company’s Return on Equity (a metric I love to use) is over 25%!

To put that in perspective, the average company in the S&P 500 has profit margins of 11% and Returns on Equity of 15% , so Cal-Maine is definitely running a tight ship.

But things haven’t always been this great for Cal-Maine and the other egg producers in the US.  They’ve had a little help from the corn market…

Due to the rising cost of corn, Cal-Maine and other egg companies have seen their feeding costs rise by 30% this year.  That may sound like bad news but since eggs are such a customary item on American breakfast tables, Cal-Maine has been able to raise its prices right along with its costs.  In fact, the company was able to increase its prices above costs and expand its margins and profits as well.

That’s why this company’s stock has practically doubled over the last 12 months – and many folks, including Barron’s, think it could double again.

I’m not sure about a double, but with a stock that’s trading at a $900 million market cap and paying a 8%+ yield, I’d still feel comfortable socking Cal-Maine away in my portfolio for a while.

But I’m also going to be keeping an eye on the corn market.  If the price of corn begins to come down in a significant way, you can bet that Cal-Maine’s profits and stock price will drop right along with it