Barron’s had a pretty well-done write-up on egg producer Cal-Maine (CALM) this week, which - although I disagree with the overall bullish tone of the article - seemed to be nicely balanced between long and short arguments.

As the Portfolio Manager of the BC Investment Club, which holds shares of CALM, I would obviously like the majority who voted in favor of the buy presentation to be correct, and to see the stock appreciate. I just have some strong doubts that scenario will materialize and hold 18-24 months out.

A little over two months back, I offered a valuation of CALM previously based on the historical returns likely to be realized from the egg industry:

With structural egg demand likely to grow at 1-2% per year, this is an outrageously high price to pay for CALM. Against shares outstanding, the above profit estimate equates to $1.23/share. On a 14.3x multiple (which I believe is quite high, all things considered), CALM would be a $17.50/share stock - about half its current price. This would also put CALM’s book multiple valuation at about 1.2x - again, a price I think is reasonable given that the industry is commodity-based and does not allow for building sustainable competitive advantages.

John Davenport, a fund manager who sold his position in CALM last month, as well as some seemingly-unnamed person or persons, believe the stock is more likely destined for the mid-to-low teens; roughly in-line with my own value estimate. While I’m open to the argument that egg prices will remain elevated for some time, it seems difficult to justify applying a 10x earnings multiple to something resembling peak earnings, as one fund manager did in trying to claim that CALM is destined to be a $70 stock. This reeks of too much talking of one’s book; that multiple is more appropriate for a mid-cycle, or normalized, earnings multiple - which, off my earlier estimates, would yield a $12.30 stock price.

Cal-Maine is slated to release earnings near the end of July, at which point an updated outlook and (hopefully) full financial details of their recent purchase of Zephyr Egg will allow for some comparable valuations to be made. Of particular interest will be the acquisition cost per bird; by my count, Cal-Maine is currently valued around $26/bird by the public markets, so what the private going-rate is should shed light on flock values. Perhaps it will even be enough to break CALM out of the range-bound trading pattern the stock has been in since falling 25% after its last earnings report - a time period which during the massive short interest has been increased even further.

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