Did you ever think your next investment might be sitting on your breakfast plate? Chances are you or someone in your family ate eggs for breakfast this morning. In the United States, per capita consumption of eggs was estimated to be approximately five eggs per person per week! Take a look at the industry leader in shell egg production-Cal-Maine Foods, Inc. (NASDAQ:CALM). The company's future prospects look bright because I believe demand for eggs will rise in the next 1-3 years. Furthermore, the company has a dominant market share and has been a leader in industry expansion for the last 23 years.
Cal-Maine Foods, Inc. is the largest producer of shell eggs in the United States, having sold 884,300,000 dozen shell eggs in fiscal-year 2012. Moreover, Cal-Maine's chicken flock is the largest in the United States. I believe investors should delve deeper into this company's financials because Cal-Maine's shell egg sales were responsible for 19% of domestic egg consumption. That is nearly one in five Americans! Don't you think it would be wise to take a further look? I think so. But let's examine further.
Cal-Maine Foods is responsible for the production, packaging, grading, marketing, and distribution of shell eggs. A large majority of Cal-Maine's sales come from 29 states primarily in the southern, Midwest, and mid-Atlantic regions. Cal-Maine Foods distributes its shell eggs to grocery store chains, club stores, food service distributors, and egg product manufacturers. Cal-Maine has adjusted to consumer preferences for cage free and organic eggs. In fiscal year 2012, value-added shell eggs represented approximately 25% of total shell egg sales. Leading poultry welfare expert Dr. Michael Appleby has said that cage-free production is a "very good step in the right direction for the egg industry." It is very encouraging that the leading domestic producer of shell eggs is acknowledging industry shifts and responding with swift ingenuity. This effort to promote cage-free eggs and proactively pursue socially ethical business operations will not only have a positive impact on Cal-Maine's stock price but also opens up a new market of consumers. Moreover, Cal-Maine Foods has signed exclusive license agreements to advertise and distribute Egg-Land's Best™- the leading brand marketer in the specialty egg segment - in major markets like New York City. I believe continued focus on marketing to its value added client base will only promote its "Culture of Sustainability" and further increase its goodwill.
Acquisition and Growth
Cal-Maine Foods has been a leader in industry expansion since 1989, having completed s16 acquisitions ranging in size from 600,000 to 7.5 million layers. Total sales grew 18.17% in fiscal year 2012 and have grown 12.78% since 2003. America's leading shell egg producer has remained focused on its expansion policies, which I believe will not only increase its production advantages but will also allow it to leverage its economies of scale in an effort to pursue expansion endeavors.
Cal-Maine Foods does not pay a fixed dividend. Rather, it has adopted a variable dividend policy as of November 30, 2007. Cal-Maine pays its shareholders a quarterly dividend of one-third of the company's net income. If Cal-Maine posts a loss, shareholders are not paid a dividend until the company is profitable on a "cumulative basis computed from the date of the last quarter for which a dividend was paid." Given the cyclical nature of the shell egg industry, management can reinvest earnings back into the company, avoid quarterly losses, and maintain stable profit margins during the summer and fall - when there is a reduction in inventory levels due to the warmer temperatures. In fiscal-year 2012, Cal-Maine Foods paid a dividend of 2.9% - the best among its peers in the poultry and meats sub-industry. Given Cal-Maine Foods' significant growth numbers and cost reduction practices, I believe Cal-Maine should not have trouble paying its dividend in fiscal-year 2013.
Cal-Maine Foods delivered strong returns in fiscal year 2012. The strong performance was due in large part to the flock production increase and labor cost savings. Cal-Maine Foods posted a net profit margin of 8.08% for fiscal-year 2012 - up 30.53% from fiscal-year 2011. Furthermore, Cal-Maine Foods saw increases in return on equity, assets, and investments of 30.84%, 43.67%, and 44.47%, respectively. What's more encouraging is the fact that return on equity has grown 25.84% since 2003. Warren Buffett is a strong advocate of analyzing a company's ROE because it is an indication of how effectively management is using shareholders' money to generate returns. Cal-Maine's focus on automating its supply chain I believe makes the company more efficient and gives it a sustainable competitive advantage of being a low-cost supplier in the shell egg marketplace - which should continue to have a positive impact on margins in the next few years.
Cal-Maine Foods currently has a price-to-earnings ratio of 11.1, a price to book of 1.92, a price to sales of 0.81, price to cash flow of 8.06, and price to net current asset value of 6.68. Cal-Maine Foods appears undervalued considering that the meats and poultry industry is trading at 21.5 times earnings on average. Moreover, Cal-Maine Food's price-to-sales ratio beats the industry average of 1.4 times sales. Assuming an 11% free cash flow growth rate, 12% discount rate, 6% terminal growth rate, and 6% capitalization rate, I estimate one share of Cal-Maine's stock to be worth approximately $89. With this in mind, I believe investors buying at any price under $60 would be making a safe investment. The reason I say this is because Benjamin Graham and other value investors advocate buying for at least a 33% discount to fair value - ensuring a large enough margin of safety.
Given the inelastic nature of the meats and poultry sub-industry, investors should be aware that Cal-Maine Foods is more susceptible to minor changes in production or consumer demand levels. Cal-Maine's largest production expense is overwhelmingly feed costs. Cal-Maine's feed costs have ranged anywhere from 62%-67% of total farm cost in the past five years. Given that the greatest cost for most egg producers is feed, coupled with a recent rise in corn and soybean meal prices, which I believe will decrease production levels in the poultry industry in the next one-three years. Corn and soybean meal crops were adversely affected by hot weather and drought conditions in 2012, thus causing the hike in corn and soybean meal prices. Decreased production will result in increased demand for shell eggs, which will put upward pressure on current price levels. What does this mean for investors? Higher egg prices will result in greater revenues and gross profits for Cal-Maine Foods in 2012. This should mean appreciation for the stock price in the rest of 2013 and into the first part of 2014.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.