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Jackson, Mississippi-based Cal-Maine Foods Inc. (CALM) posted first-quarter 2012 adjusted earnings of 13 cents per share, beating the Zacks Consensus Estimate of 11 cents but deteriorating from 20 cents earned last year. The year-over-year decline in earnings was due to higher feed cost, which according to the company would remain a cause of concern for the rest of fiscal 2012.

Inside the Headline Numbers

Total revenue, in the quarter under review, leaped 28% year over year to $243.8 million. The upswing resulted from stronger volumes of eggs sold as well as an increase in net average selling price.

The largest U.S. producer and distributor of fresh-shell eggs stated that demand for eggs at the retail level remained strong. Specialty eggs which have higher selling prices continued to see improved sales and accounted for 15.7% of total dozens sold compared with 14.9% in the year-ago period.

Gross profit increased 3.4% from the prior-year quarter to $33.8 million but gross margin contracted 324 basis points (bps) year over year to 13.8%, mainly due to a spike in feed cost. During the quarter, feed costs were up 15 cents to nearly 48 cents per dozen compared with the first quarter of fiscal 2011 backed by higher overall grain prices, especially for corn. Operating income also fell 26.0% year over year to $5.6 million, while operating margin dropped 180 bps year over year to 2.4%.      

Financial Position

Cal-Maine ended the quarter with cash and short-term investment of $177.2 million, long-term debt of $73.7 million and shareholder equity of $421.6 million.

Our Take

Cal-Maine engages in production, grading, packaging, marketing and distribution of shell eggs primarily in about 29 states across the southwestern, southeastern, mid-western and mid-Atlantic regions of the U.S. 

Given the slower growth in earnings, a decline in margin as well as escalating feed cost, we remain cautious on the stock. Management expects feed cost to remain stubborn for the remainder of fiscal 2011 and beyond. However, on a positive note, revenue witnessed a higher growth trajectory buoyed by strong retail demand.

Hence, Cal-Maine Foods currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We maintain our long-term Underperform recommendation on the stock. Cal-Maine faces intense competition from BRF - Brasil Foods S.A. (BRFS).

 
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