Sector financial performance:

This company, which primarily produce, grade, package, market, and distribute shell eggs, has been grouped into shell egg sector in food industry.

While exports and industry’s demand for egg products vary, the demand for fresh shell egg has been staying strong and consistent with the growth in many other food sectors, which are influenced by population factor. It seems that eggs producers have no control on the feed costs of hens. Therefore, in this sector it is basically the selling price determines everything and because duration of supply and demand cycle is relatively short and the adjustment of production is relatively easy the prices of egg are usually widely fluctuate, resulting in the large volatility of companies’ margins and profits.

The recent avian influenza outbreak in 2015 significantly influenced the shell eggs industry, mainly for its prices (according to Nielsen data, retail customer demand for shell eggs has remained strong). Egg prices per dozen increased significantly during the summer and fall of 2015, and reached peak in August of 2015 at $2.97.  After that, the prices started to decline until the low level in summer of 2016. And then the prices went up and down again to the record low level in spring and summer of 2017. In 2018, price rebounded back to about $1.3 or $1.4.

Correspondingly, the companies’ sale, margins, and profits changed as prices did. Because feed costs have been decreasing in the past four years, as selling prices fluctuate the typical company’s gross margin and operating margin reached to the highest in 2016 at 34% and 25% respectively and then went down in 2017 to 4% and -12% due to the plunging of the selling price of egg. In 2018, the gross margin went up to about 25% and 14% respectively.

While it is common in this sector that price and supply are largely volatile, we think if there was no AI outbreak the price should not have fluctuated in such a large range from historical peak to almost historical low in two years. While uncertainties we think the price is on the way to go back up and volatility is getting narrow.

According our analysis, a typical ratio of enterprise price/adjusted EBI should be 25 with less 1% interest/EBI ratio.  The ratio of enterprise price/ sales should be 1.5.

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Company performance:

Based on the flowing data related to this company’s sales, average selling prices, and average costs for the past four years, we can see that the demand for this company’s eggs has stayed constant given the constant sales volumes ( in range of 4% in volatility)  if we simply use the sales number divided by the average price for that period.

For first quarter of fiscal 2019 compared with same period of 2018(ended 20180901)

This company’s net average shell egg selling prices increased by about 29% to $1.3 per dozen. Shell eggs dozen sold increased 0.2%. Net sales increased 30%.  Feed cost per dozen produced decreased 1.3%.

For fiscal 2018 compared with 2017(ended 20180602)

This company’s net average shell egg selling prices increased by about 39% to $1.4 per dozen. Shell eggs dozen sold increased 0.6%. Net sales increased 40%.  Feed cost per dozen produced decreased 1.3%.

This company’s net average shell egg selling prices for the years ended May of 2017, 2016, 2015, and 2014 are 1.01, 1.74, 1.43, and 1.36 respectively. Net sales for the years ended May of 2017, 2016, 2015, and 2014 are 1074, 1909, 1576, and 1441.  Feed cost per dozen produced for the years ended May of 2017, 2016, 2015, and 2014 are 0.399, 0.414, 0.439, and 0.493.

The changes in margins and profits primarily come from the volatility of the selling price. We can see, during the years from fiscal 2014 to 2016, as the average selling price raised the total sales numbers continued to increase (annually increased by 9.5% and 21%  in 2015 and 2016,) . And because the average feed costs have decreased during the same time, this company’s margins continued to be improved (gross margins: 21% of 2014, 25% of 2015, and 34% of 2016; operating margins: 10% of 2014, 15% of 2015, 24% of 2016). Therefore, while it also spent more on SG&A gradually, it’s operating income increased by 62% and 100% in 2015 and 2016 and its cash inflow increased at the same pace. However, after enter 2017, due to the sharply falling in the average selling price, which is much faster than the decrease in feed costs, this company’s margins and profits significantly dropped as the sales decreased by 43%. (gross margin down to 4.2% from 34% and operating margin down to -12% from 24%). This company’s operating income and cash inflow went down by 127% and 140% compared with that in 2016.

As the selling price rebounded in 2018 and the continuing decrease in feed costs, we have seen the improved gross margin (about 25%) and operating margin (14%).

Stock price

This stock currently has an enterprise price/EBI ratio of around 16, which we think, is relatively overvalued under the consideration uncertainty in price.

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