BERAL, INC.  
Andrew G. Racz  
Director of Research  
300 East 54 Street, Suite 26C  
New York, New York 10022  
Telephone: (212) 319-6949  
Fax: (212) 753-1944  

 E-mail: mlikar@aol.com   

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August 4, 2008

The egg business in the entire world is segregated into individual countries. Each country produces and markets its own eggs. Exporting of eggs is, however, a greater value each year. Cal-Maine (CALM) sold 685 million dozen shell eggs in the year ending June 2007, representing 15.5% of the domestic shell egg consumption. Our total flock approximates 23 million layers and 5 million pullets. CALM is the largest in the United States, and markets its shell eggs in 29 states. The customers are the largest retailers. In fiscal 2008, CALM sold 900 million dozens of domestic shells.

The two distinct brands are Egg-Land’s Best and Farmhouse. Actually CALM owns 25.9% equity interest in Egg-Land’s Best.

CALM has been engaged in industry consolidation. Since 1989, the company completed 13 acquisitions ranging in size from 600,000 layers to 7.5 million layers.

The per capita consumption, which is the total egg production divided by the total population, is relatively stable.

Exports of processed egg products to Japan, the single largest market, showed some decrease, falling 19 percent, to $25.3 million. Japan accounted for 34 percent of total exports in 2007. Helping boost the bottom line, however, was Mexico, thanks in part to USAPEEC’s efforts there to promote the use of U.S. egg products in commercial applications and food service. Shipments to Mexico shot upward by 33 percent, to $9.5 million. Sales to Canada, another leading market, increased 2 percent to $7.9 million.

Hong Kong remained, as it has for years, the top market for U.S. table eggs. Shipments to Hong Kong of 25.4 million dozen were up 20 percent last year, even though value of $19.0 million increased significantly by 40 percent.***

Source: U.S. Dept. of Agriculture, **American Egg Board, ***USAPEEC

Accordingly, the spread between cost and the eggs’ selling price, rather than gross per consumption, decides the profit.

For instance, the rapid growth in revenues is reflected in dramatic profit growth, as illustrated in the table below.

These figures are coupled with record high egg prices.

The third quarter of fiscal 2008, as well as the just announced fourth quarter, took advantage of favorable economics in the egg industry. Demand was strong in every facet of the industry. The key issue to emphasize is that eggs still represent a good value to the consumer compared to other foods.

Even though feed costs continue to be very high, the projection for egg production and prices is still growing. In general we live in the age of commodities. Wheat, corn, soybeans, just as copper and gold and oil, are in greater demand for a very simple reason: when the world’s population is up to 7.5 billion people, compared to 2.5 billion in 1945, and when 5 billion people are working the biggest shortage which is building up for the next decade is not oil, which can be substituted and saved, but food. We have a food crisis; we have a world crisis.

CALM is an important company in the U.S. economy. It represents 15% of the egg supply in the biggest economy in the world. Management wants to expand the horizon and to reach 30% of the egg business in the near future.

Let us explain why such ambition can happen. In March 2008, the average selling price of eggs was $1.48 (one dozen shell eggs) compared to $0.98 a year before.

This is The Commodity Age. While the supply of commodities—corn and soybeans—has gone up, so did the selling price.

Furthermore, when we break down the operating figures the percentage of net income increased to 20.6% of revenues in March 2008, compared to 9.9% a year before.

Our earlier analysis of the yearly figures indicates that total net income for the year ended May 31, 2008 amounted to $130 million, which enabled in the same year stockholders’ equity to increase from $155.7 million to $275.7 million.

Accordingly, the current and next two fiscal years may bring in over $250 million net income, which would double stockholders’ equity to $500 million and leave CALM technically without any long term debt.

What it amounts to is that the company could easily borrow $200 million and actually purchase 15-20% of America’s smaller egg producers.

In fiscal 2008, revenues reached, based on the higher margins, $915.9 million. Two years later we would be talking of a $2 billion company with a net income base of $250 million, a remarkable achievement when we go back to the year 2002 or 2003.

The pro forma picture of this hypothetical $2 billion company not only represents a great corporate achievement but creates an all-powerful competitor in one of America’s basic food industries.

Our opinion is that five years from now we may have penetrated the power of the OPEC cartel. We may build electric cars and have solar energy.

However, any intelligent economist will come to the conclusion that the food crisis is going to be greater in the year 2012 than it is in the year 2008.

CALM is now navigating to be in the same league as Coca-Cola, Gillette or Hershey’s. They are not monopolies; they are dominant factors in their industries.

From the point of view of the stock market they will get a premium multiple. Today CALM is selling at $41, about five times its just announced $6.41 per share.

If we add up the future cash flow and project out the income, it is not unreasonable to believe that in five years time, with 30% of the industry, the company will earn $10 per share. Utilizing the institutional 20 multiple for a dominant food company, the target is $200 per share.

Fred Adams, Jr., chairman and chief executive officer of Cal-Maine Foods, Inc., stated, “The results for the fourth quarter reflect good demand for eggs and strong egg prices. The overall supply of eggs was slightly lower than the same period last year, which contributed to a more favorable market balance. Feed costs continued to be very high, reflecting the rising costs of corn and soybean meal.”

“For fiscal 2008, our results reflect very good egg prices, record high feed costs, and a solid performance by the Cal-Maine management team. As we look ahead, we see continued strong demand for eggs, a slightly higher, but manageable, egg supply, and further volatility with respect to corn and soybean meal prices. All of our operations are running smoothly, and we are optimistic about Cal-Maine’s business for the years ahead.”

A list of the top egg producing companies appears below. The size of the competition indicates that half a dozen acquisitions can accomplish the goal of 30% dominance of CALM in the egg industry.

There is a possibility for a major expansion of CALM due to its high cash flow and the better utilization of surplus cash generated by the company.

There are numerous and totally unusual features:

The growth of CALM in the last year is impressive.

The potential interest growth in the next two years would be manifold.

Fiscal           2009 2010 2011   ( $, MIL) Revenue 1.000 1.110 1250.00 New Income 152 165 175 Stockholder Equity 400 550 700

Borrowing up to $200M, and acquiring another 15% of the egg industry, we can create a $2.0B corporate entity, with about $250M net income.

Within two years after the acquisition, the new company can repay the debt and the following year there can be an annual cash flow (net after expenses) of about $300 million.

As a dominant company, such an entity can command a market capitalization of $3.0B.

Assuming a 20% error in our calculations, the price target for CALM is $10 earnings per share.