The Incredible Price Jump in Eggs

 | Jan 17, 2012 | 8:00 AM EST  | Comments
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calm

,

cost

Over the past month I have noticed my weekly purchases of eggs beating (pun intended) up the wallet. I didn't think too deeply on it because my food expenditures were not tracked on a granular-spreadsheet level. That is until a trip to Costco (COST).

The wholesaler is the go-to destination for cartons of four or five-dozen eggs at an unbelievable price, unless you are able to house 12 chickens in the one bedroom apartment.  Normally, the purchase of five dozen eggs would set me back about $7.00 and change, a relative steal compared to the supermarket which hawks 18 eggs for $4.59 a pop. But I was whacked with a bout of sticker shock after gently placing 60 eggs in the supersized Costco basket. The price was $10.29.

Aside from leaving the store in disbelief, I made it a point to go home and study harder the PPI and CPI reports prior to fresh reads this week and see if there was a way to profit off egg price mania. Consumer price increases for food at home and away from home have decelerated since Sept. 2011, making the apparent ascent in egg prices quite interesting.

I was reassured that my brain has not been totally scrambled when finding out that the price for a dozen eggs has skyrocketed in a month's time. According to YCharts.com, U.S. egg prices have risen 20% this month (monthly annualized growth rate of 235.29%) from December after having been fairly stable dating back to the beginning of 2011. Yet, the coolers holding the eggs at Costco, and the local supermarket for that matter, have sure looked as if consumers have not balked at the price increases. If consumers have taught the stock market anything in the past two years it's that they will cut a non-necessity from the grocery basket to pay more for something deemed a staple, in this case eggs.

Want the financial jargon term for this phenomenon? It's pricing power. Egg pricing power is clear in Cal-Maine's (CALM) recent earnings report. I don't think the company's earnings garnered enough respect by the market (pricing power plus solid demand), and the stock is not reflecting a cost outlook that should be cooler than 2011 (see the crop report).

Reasons to put Cal-Maine in your portfolio

  • Consumers have appeared to not balk at higher egg prices. If they did raise the white flag, it would have developed in a sharp slowdown in demand during Cal-Maine's quarter (food producers, like semiconductors, are known for boom and bust financial periods), which reflected holiday buying.
  • Cal-Maine has guided Wall Street to be cautious with respect to its input cost outlook. But with new evidence having been presented that costs will not run away in 2011 (barring draught, etc.) the company has teed itself up for earnings surprises (especially so since the company has very little coverage by analysts on the Street, odd since it's the largest egg producer in the country).

Granular details

  • Experiencing broad-based strength in higher margin eggs sold (nutritionally enhanced, organic, cage free, which make up 23% of total sales) and offshoots, such as liquid egg whites.
  • Fundamental checklist trifecta: coverage ratios up, debt to equity ratio down, inventories turning quicker. This makes me wonder if the company is poised to raise its dividend payout ratio (stock yields 3.5% currently).
  • Prices hiked by 17% in most recent quarter, but dozens of eggs sold rose a solid 6%.
  • Through efficiency measures, gross profit margin expanded a nifty 200 bps, in the face of elevated costs. As costs level out and price increases stick to a certain extent, the company has a path to potentially log strong earnings quarters that are enhanced by prior work to make the business more productive.

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