Cal-Mine Foods: A Grade-A Investment

| About: Cal-Maine Foods, (CALM)

Cal-Mine Foods (NASDAQ:CALM) has been hit hard by the Street in the past two years. Since reaching a high of $45.83 in mid-August 2008, the company has seen their share price decline 27.17%, to Friday’s closing price of $33.38.

At today’s market cap of $794.68 million, the company is trading at a PE of 9.99x fiscal 2009 earnings of $79.50 million. In the three months since then (fiscal year ends 5/30) the company has also produced solid results, with net income of $46.79 million in the last 9 months. The company also has $207.22 million in cash and short term investments, compared to a total debt of $147.93 million.

At the Burkenroad Reports Investment Conference in New Orleans last week, the company announced that they are planning to focus on building their specialty egg business, a move that could significantly affect their overall profit in the future. “There is growing demand for specialty eggs,” said Cal-Mine president Dolph Baker. As of his most recent filing, Mr. Baker owned nearly 208,000 shares in the company’s stock; as I’ve discussed in a previous article on Cal-Mine Foods, I like when management is eating their own cooking.

The shift has already begun at Cal-Mine, with specialty eggs accounting for 19% of shell egg sales volume in 2009, a jump from 14.2% in 2008 (32.1% increase). Considering that specialty eggs only accounted for 13.8% of total shell egg volume sales, it is clear that specialty eggs are a higher profit margin product, and can add substantially to Cal-Mine’s bottom line as they become a larger portion of their sales mix. The company also owns a 29.1% equity interest in Egg-Land’s Best, which markets the leading brand in the specialty shell egg segment.

As far as their strategy, Cal-Mine has shown in the past that they have been successful through acquisitions, having completed sixteen since 1989. I believe that Cal-Mine will likely look to stick to this strategy, and will add a large number of specialty layers to their current portfolio in the near future.

With a current annual dividend payment of 5.75%, a trailing PE ratio of less than 10x earnings, and a clear plan to successful implement growth in their most profitable part of their business in the future, I believe Cal-Mine is a Grade-A investment at this price.

Disclosure: Author holds a long position in CALM