October 3, 2007

 

Investors prop up stocks of US chicken and egg companies as prices rise

 

 

While consumers are paying more for eggs and chicken meat, investors are seeing high returns of their investments in these companies.

 

Shares of Cal-Maine, the largest egg supplier in the US has risen a whopping 193 percent since the beginning of the year, according to smartmoney.com

 

The company, the only one in the country that is listed, sells table eggs and specialty reduced-cholesterol and cage-free eggs under the Eggland's Best and Farmhouse brands. It supplies retail chains like Wal-Mart and Sam's Club. The stock now trades at slightly over US$24.

 

Stocks of Sanderson Farms, a chicken processor, rose 38 percent so far from the beginning of the year to close at US$41.75 last week. This outstrips two other giants in the industry, Tyson Foods and Pilgrim's Pride, whose shares were up 10 percent and 21 percent respectively, the report indicated.

 

Poultry processors have adjusted to higher feed costs and would remain disciplined while costs continue to increase, according to a stock analyst.

 

In Cal-Maine's fiscal first quarter, which ended Sept. 1, Chief Executive Fred Adams Jr. said the company benefited from excellent egg prices during a normally weak quarter. Net sales increased 55 percent to US$178.6 million, enabling the company to net a profit of US$18 million.

 

Demand for eggs was good from both retail and food service customers in the US and export sales to Europe and Japan were strong, the company said.

 

Average selling prices of eggs increased 24 percent in its most recent fiscal year, which ended June 2.

 

The company said the cyclical nature of its business enables it to enjoy high prices now. High prices would remain as long as supplies remain tight, a company spokesman said.

 

Cal-Maine's shares are currently trading at about 16 times the company's earnings, compared to the S&P 500, which is trading at about 18 times earnings.

Cal-Maine relies on a strategy of acquisitions for growth.

 

The rise in chicken prices also gave chicken companies plenty to smile about, despite high feed prices.

 

In Sanderson's fiscal third quarter, which ended July 31, net sales prices per pound of poultry were up 40 percent over the previous year.

 

Chief Executive Joe Sanderson attributed strong export demand for some of the pricing power: Exports overall were up 13 percent in the first half of the calendar year, with Hong Kong and China importing 72 percent more chicken compared to a year ago, Sanderson said.

 

Analysts believe the poultry industry has fared better than other meats as the chicken industry is more consolidated and vertically integrated, making it more adept at controlling production. The shorter life cycle of chickens also make production control easier.