Reaction to my last report on Seeking Alpha

After giving a few days to subscribers before making my research public, I offered the last report on my website and on Seeking Alpha.

Here's an exchange between me and a reader regarding one of the companies in the report, special situation Cal-Maine (CALM):

Feckless191

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Author needs to update his information... re: "My estimate of intrinsic value for CALM is $41.40 based on a free cash flow value of $50 per share and a value based on dividend yield of $32.80 per share."

There is no "dividend yield", currently, nor will there be a "dividend yield" for CALM shares, in the near future. Please check the company's own web site, which clearly explains the dividend policy. CALM dividend is a function of "cumulative earnings", and no dividend will be paid until past losses are recovered and a "net positive" in earnings, over time, occurs.

In the previous 3 reporting periods, CALM reported losses of ($376,000, $30,936,000, and $23,010,000). That's ~ $54.4 Million in accumulated losses that must be recovered before any dividend can be paid by CALM. This coming Monday. CALM will report the most recent quarter, and with the price of shell eggs not much above the $0.971 / dozen shown as the primary factor for losses in the last reported quarter, I am thinking CALM will again report a "net loss", which only digs them into a deeper hole, as far as any potential future dividend is concerned.

Roderick MacIver, Contributor

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Author’s reply »

 

Thank you Feckless. My information is actually correct but as you point out, could have been explained better. I use four approaches to value:

- free cash flow, which assuming no major changes in liquidity (unusually high receivables or inventory) is based on earnings plus depreciation minus capital expenditures.
- earnings
- earnings growth
- long term (15 year if available) dividend yield divided by trailing 12 month dividend, if any.

If a company has no earnings, or earnings growth, and no dividend yield, but does have free cash flow, I rely solely on free cash flow. If it has none of the above, it is automatically excluded from my analytical process, although I do recognize that many if not most of these companies will ultimately recover.

To be more specific as far as my analytical process applies to CALM, based on TTM dividend (which of course, of necessity needs to be based on trailing twelve months dividend as reported, not as projected) of $1.19 divided by the 15 year average yield (to encompass at least one complete business cycle, particularly in highly-cyclical companies such as CALM) of 1.73% indicates a value of $68.93 per share, which I discounted to $32.80 per share for the reasons you point out.

Ultimately, you will be correct that my value is high if CALM does not pay a dividend in the next several years. However, the weakness I see in my report, after having a couple of weeks to mull it over is the opposite. Of all of the companies my report reviews, CALM may be the best long term investment based on quality of management, quality of balance sheet, quality of market position, long term return on capital, long term dividend yield, long term growth.

My mistake may have been not selecting it as the holding with the best long term investment potential, rather than PMD. I find it helps, often, to have the perspective of time after doing research, to reach a conclusion.

Long term, I certainly believe that CALM offers the lowest risk (at current prices) in relation to the potential upside, although PMD does offer the potential of truly explosive growth.

Thank you again for your comment. I review hundreds of companies in the portfolios of master investors each week, and so my process sometimes lacks depth in a particular company, as you obviously have in CALM. I appreciate your well-informed input. I'm not just saying that -- if you read my other comments here on Seeking Alpha you will see I have no problem dismissing poorly-thought out reactions to my research in a blunt and undiplomatic way.  I value your perspective and hope you will offer your thoughts on my research should you come across it here on Seeking Alpha in the future.