Cal-Maine Is An Excellent Value Play
Summary
- Cal-Maine is doing well so far this year despite record production and increased regulations.
- Cal-Maine’s management demonstrated financial prudence by reducing long-term debt in the past year.
- Cal-Maine pays a solid dividend.
On March 30, egg producer Cal-Maine (NASDAQ: NASDAQ:CALM) came out with its Q3 2015 earnings announcement and 10-q. The company beat the Wall Street expectations game on the revenue front but missed by $0.05 on the EPS front serving as a catalyst for a roughly 2% decline in stock price on the day of the announcement. However, Cal-Maine's Q3 results continue to prove Cal-Maine is a compelling investment. Here's why.
The numbers
Cal-Maine saw its year-to-date revenue, net income and free cash flow increase 10%, 48% and 150% respectively. In addition, Cal-Maine's management exercises excellent financial prudence by maintaining a solid balance sheet. Its $238 million in cash and liquid investments comprised 35% of stockholder's equity in the most recent quarter exceeding my personal threshold of 20%. Amazingly, the company even reduced long-term debt 15% year-over-year. In the most recent quarter, Cal-Maine's long-term debt equated to 6.4% vs. 8.6% for the same time in 2014. Interest expense declined as a result contributing to the increase in net income.
What drove the numbers?
Two main things drove Cal-Maine's revenue: increased demand and price increases. Any business owner wants to see demand for products increase vs. artificial or temporary improvements such as acquisitions which could disguise a decrease in demand to the casual stock market observer. The demand increased despite a record level of hen flock according to the earnings announcement.
The company is still benefiting from the healthy lifestyles movement which served as a catalyst for a 24% increase in its specialty eggs sales so far this year. Moreover, record corn and soybean harvests due to more favorable weather conditions in North America drove year-to-date feed costs down 9% contributing to net income expansion. Demand also drove free cash flow expansion despite a 52% year-over-year increase in capital expenditures.
Over the past five years the balanced trifecta of demand, price increases and expansion via acquisitions contributed to the expansion in revenue, net income and free cash flow expansion of 65%, 104% and 13% respectively. This translated into a total return of 145% total return for company shareholders vs. 98% for the S&P 500 (charts below).
CALM Revenue (TTM) data by YCharts
CALM Total Return Price data by YCharts
A value opportunity exists
Fears and concerns over a possible bursting of the egg bubble as well as possible detrimental effects of increased regulations in places like California have sent Cal-Maine's shares down 11% in the last six months. This caused the P/E ratio to decline significantly during that time. The company currently trades at a P/E ratio of 13 vs. 20 for the S&P 500 (see charts below). This makes it a good time for investors to get in.
CALM data by YCharts
CALM PE Ratio (TTM) data by YCharts
Solid dividend
Cal-Maine exercises prudence in its dividend policy-it only pays out 33% of its net income in dividends. If the company doesn't have net income then it doesn't pay a dividend preserving the company's financial position during times of difficulty. Of course I always judge dividend sustainability by comparing how much a company pays out in dividends vs. the true measure of profitability-free cash flow. I always like to see companies pay out 50% or less in free cash flow and retain the rest for other purposes. So far this year Cal-Maine has only paid out 42% of its free cash flow in dividends. Currently the company pays $1.01 per share per year translating into a yield of 2.6%.
Thoughts on the future
Cal-Maine's management doesn't want to rest on its laurels. They want to strengthen Cal-Maine's position as the largest egg producer in the United States by expanding in Texas, Kentucky, Kansas, and Florida. They also want to enhance efficiency and cut cost. Also the healthy lifestyles movement should serve as a partial catalyst for future fundamental expansion via its specialty egg segment. Prudent financial management should only serve to enhance these initiatives and provide a cushion during hard times. Finally the icing on the cake is that the company's low P/E ratio serves as an excellent entry point for investors to get in and collect a dividend while they wait for the price to return to highs. Cal-Maine deserves a long-term spot in your portfolio.
This article was written by
Analyst’s Disclosure: The author is long CALM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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Comments (3)
Very much enjoyed your write up on CALM. The stock has gone from $38 at the time of your publication to $56 today. With no apparent notice by the SA audience. So congratulations on a great call.
