Cal-Maine Foods (Nasdaq: CALM), the largest producer and distributor of eggs in the U.S., posted a staggering 65% slump in its fourth-quarter profits, as high feed costs ate into its revenues.
Top-line growth couldn't rescue profits for the Mississippi-based company. Is it a sign of permanent weakness, or was it just a bad quarter?
The numbers
High demand during Easter propelled egg prices up by $0.05 a dozen, taking Cal-Maine's revenues up by 9% from the year-ago quarter, to $242.4 million. Unfortunately, the cost of feed rose by $0.12 a dozen, offsetting the higher egg prices. As a result, the bottom line tanked to $7.3 million, from $21 million in the same quarter last year.
Prices of corn and soybean, key feed sources, have risen significantly, hitting many food companies. High feed costs offset Tyson Foods' (NYSE: TSN) meat prices last quarter, impacting its earnings, while poultry processing company Sanderson Farms (Nasdaq: SAFM) incurred second-quarter losses driven primarily by soaring feed costs.
Meanwhile, companies like Archer-Daniels-Midland (NYSE: ADM) and Bunge (NYSE: BG), which process corn and seeds to produce animal feed, see gains in this situation. Both companies posted strong results in their most recent quarters.
From a balance sheet perspective, Cal-Maine looks healthy. Its long-term debt-to-capital ratio has been declining consistently over the last few quarters, and currently stands at 15.1%. The cash position looks reasonable, too, at $176.4 million for the quarter. The current ratio remains high at 3.3.
Good news for investors: The company maintains its dividend-paying trend, announcing a fourth-quarter cash dividend of $0.102 per share.
The egg view
Tyson raised its meat prices a couple of months back in the wake of higher feed costs. But passing on higher prices to consumers may not be as easy for Cal-Maine, as the company deals only in eggs and this is a commoditized product.
What the company may do is restrict supply, which could boost egg prices, as the demand is relatively inelastic. This is probably what the company meant when it said a "smaller national flock" contributed to higher egg prices in the latest quarter. Moreover, I do not foresee a major slump in demand for eggs, as they remain a cheaper source of protein as compared to meat products.
The more important factor that works in Cal-Maine's favor is its continued focus on specialty or organic shell eggs, which are less volatile while being priced higher. Specialty egg sales grew, contributing 24% to Cal-Maine's revenues in fiscal 2011 as compared to 21.4% in fiscal 2010. These positive numbers could give the company further reason to expand the specialty eggs business.
The Foolish bottom line
Along with average selling prices, the volume of eggs sold has also risen both quarterly and annually for Cal-Maine, locking in revenues. Feed costs remain the primary concern. Keep an eye on corn and soybean prices, and you may have an inkling of how the company will perform. As long as they remain high, the egg company will be under pressure. Otherwise, the stock looks like one that could satisfy appetites.
