Cal-Maine Foods: Eggs in One Basket

| About: Cal-Maine Foods, (CALM)

Even though the best days of the agriculture boom may be behind us, I have found a related play that I think still has some upside. It is Cal-Maine Foods, Inc. (NASDAQ:CALM) which, given the volatility of this market, sounds good immediately.

Cal-Maine is in the egg business in a big way. In fact, they are the largest producers of eggs in the United States, with over 15% of the total annual egg consumption. That's a lot of chickens and when the chickens come home to roost at Cal- Maine there are 23 million of them! Last year they lay 685 million dozen eggs. That's a lot of chicken power!

Cal-Maine operates in 29 states and has been steadily adding to its production by acquiring smaller players. Since 1989, they have bought 10 companies but since the industry is quite fragmented and the company still wants to grow there are lots of targets available to them.

Things have been good in the egg business and, as a result, the company has adopted a new and unusual dividend policy. Effective with the third quarter of fiscal 2008, which ended on March 1, Cal-Maine will pay a variable dividend for each profitable quarter. The payment will be an amount equal to one-third of the quarterly profit. The first of these variable dividends was paid on April 28 and amounted to 80.7c per share.

The good side of this policy is that it gives shareholders a clearly-defined stake in the company's bottom line. The downside is that the dividends, and hence the yield, are unpredictable.

In 2007, for example, the company reported net income of $36.7 million ($1.66 a share) for the whole year. Based on the new formula, that would have produced a total dividend of 55c a share for the year. That's less than the April 28 payout. In 2006, Cal-Maine posted a net loss, so no dividend would have been paid.

Based on previous experience, the third and fourth quarters are the strongest ones for the company, so we can expect another good dividend in July. The company lost money in the first quarter of fiscal 2007 (the September-November period) and made a small profit in the second quarter.

But there are many factors at work here. For starters, the price of eggs has been very volatile and the company's bottom line will be directly affected by movements up or down. Then there are public attitudes to consider. Some of you will recall the period when eggs were considered bad for you and a lot of people stopped eating them, which needless to say wasn't great for the egg producers. That concern seems to have gone away and now health officials are telling us that eggs are a good source of low fat protein. Also, the rising cost of grain, especially corn, has a direct impact on Cal- Maine's profits.

On the plus side, egg prices have been high because supply has been constrained and demand has been steady so profits have held up very well. The company's first quarter was excellent with its EPS tripling from 74c to $2.41 a share on 59% higher sales.

The bottom line is that while this new dividend policy will likely mean more cash flow to investors, the quarterly amounts will vary and there may be no dividends at certain times of the year. So when you see projections of a 10%+ yield, take them with a grain of salt. They're based on a single quarter under the new system.

The shares closed mid-week at $33.91. That's about six times trailing 12-month earnings, which should provide a cushion if egg prices drop. This stock carries above-average risk but it's paying out well and it's off almost $7 from its 52-week high.

Action now: Buy with a target of $38.

Disclosure: Author has a long position in CALM