The Golden Eggs of Cal-Maine
riddhi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Cal-Maine Foods (NASDAQ: CALM), the largest fresh eggs producer in the United States (with about 16% of the market) might sound like an easy company to analyze. However, performing analysis on a stock like Cal-Maine is actually more difficult than it appears. It would be easy to look at rising feed costs and immediately conclude that margins are about to get crushed, but it is a lot subtler than that.
Into the numbers
Cal-Maine Foods beat expectations on revenues but missed estimates on earnings per share. The company posted a quarterly income of $37.3 million or $1.56 per share in its latest quarter, more than five times the $7.3 million or 30 cents per share, in the same period last year. Revenue for the year crossed $1 billion for the first time, hitting $1.11 billion, up from $942 million in fiscal 2011. Feed costs had increased 7.3% over last year during the final quarter and would likely increase in coming quarters due to a predicted weak U.S. corn harvest.
What Drives the Share Price?
That profit spike was driven by an extra week of sales this quarter and a $27 million gain from its joint-venture with Land O’ Lakes, a New Jersey-based egg cooperative, to produce and sell branded specialty eggs.
Egg pricing is highly sensitive to small shifts in production and demand, as it is a price inelastic good. Retail demand was strong and helped the market absorb a slightly higher egg supply with an 8.6% increase in eggs produced and 11% increase in eggs sold compared with the same period a year ago. Sales of specialty eggs have shown 9.1% increase in volume as consumer demand trends shift towards the perceived health benefits of organic and natural food alternatives.
Cal-Maine acquired Greeley-based Pilgrim’s (NASDAQ: PPC) commercial egg business in July. Pilgrim's is a producer of poultry in both the United States and Mexico and has an excellent reputation and strong brand recognition with a well-established customer base. Hence, this acquisition would help Cal-Maine improve its penetration in those markets with a ready-made customer base which Pilgrim already has.
Cal-Maine CEO Dolph Baker indicated that the egg producer and distributor was seeking other acquisitions as part of its growth strategy.
This would help Cal-Maine in warding off competition from Brasil Foods (NYSE: BRFS), a Brazil-based company engaged in the food processing industry. Brasil Foods has performed terrifically in recent times. Its earnings per share grew this year by 71.03% and analysts expect Brasil’s performance to improve further going forward, as evidenced by a forward P/E of 12.81 as against the trailing P/E of 22.42. Hence, Cal-Maine’s strategy of inorganic growth seems like a good way of trying to match up to its bigger peer.
A stock to buy?
At first glance, here’s what I see in Cal-Maine. I see a company that is running a decent business that is profitable and bringing in cash, and they are reasonably priced. The company is well positioned to take on more assets at the moment. Cal-Maine Foods offers a strong balance sheet loaded with excess cash and short-term securities, and an attractive level of free cash flow. Moreover Cal-Maine has a pretty solid dividend-yield of 3.80%, which is another positive if you wish to go long on the stock.
All in all, it won’t be a bad idea to look at Cal-Maine from an investment viewpoint considering the various positives it has in its bag.
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