Cal-Mine Foods (CALM), which is engaged in the production, grading, packaging, marketing, and distribution of shell eggs, recently reported earnings for the first quarter of fiscal 2010, which ended February 27th. Net income for the quarter came in at $34.5 million, or $1.45/share, beating analyst estimates (consensus $1.34/share) as well as topping the $1.30/share earned during the same period last year by 12%. Despite beating estimates, the street pushed the stock lower, due to both a cautionary outlook for the immediate future, as well as lower feed costs during the reported period, which made the numbers appear stronger than usual. The cautionary outlook came after two quarters of softer-than-expected sales volume, along with light consumer demand which caused egg volume to drop by 2.7% from a year ago.
Regardless of these short term implications, I feel that Cal-Mine is a conservative long term investment with a solid business plan. Over the past four years, the company has increased their total flock from approximately 22.3 million to 33.5 million as of May 2009. An increase in total flock directly relates to an increase in net sales, which has grown from $375.3 million to $928.8 million during that same period. A business model which has fueled growth with sound acquisitions while still maintaining a solid balance sheet has allowed the company to significantly expand their operations over the past decade with no indication of change anytime soon. Since 1989, the company has completed sixteen acquisitions, as well as two more that were completed in the past three months. The company plans to continue growing through sound acquisitions, a strategy that has proven effective in the past and should continue to provide adequate returns in the future.
Another factor hidden in the numbers from the quarterly report are specialty egg sales. Specialty egg sales are important to the company because they are less cyclical than traditional egg sales, and are generally more expensive since consumers are willing to pay for the increased benefits derived from them. Specialty eggs are sold at higher profit margins than traditional shell eggs, meaning the company can look to profit substantially from the shift to organic and cage-free eggs as the demand for these products grow. Specialty eggs accounted for 19% of the company's total sales in 2009, compared to 14% in 2008. For the quarter, despite overall weak demand for eggs (2.7% decline by volume), specialty egg sales for the past three quarters totaled 86,119 dozens, compared to only 80,028 for the same period last year, a gain of 7.6%. Even though the results for the quarter were adversely affected by weak demand, I believe that a continued strategy of flock growth through acquisitions and penetration of the specialty egg market will pay dividends for Cal-Mine investors in the long term.
Disclosure: Long CALM