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Cal-Maine Foods Is a Good Buy

April 19, 2014 | About:
Vinay Singh

Vinay Singh

5 followers

One of the most popular breakfast items in the U.S. is eggs. A large number of people in the U.S. prefer eggs as an important dietary supplement. This has led to an increase in the per capita consumption of eggs from 247.7 in 2011 to 248.7 in 2012. Additionally, it is expected to rise to 250.7 for 2013 . Therefore, producers and marketers of eggs have been enjoying this trend.

Cal-Maine Foods (CALM) is the largest producer of shell eggs in the United States. It has been largely benefiting from the increase in egg demand, as reflected by its second-quarter results. Its recently-reported quarter was better than analysts' expectations, making investors optimistic about its future.

Reasons to smile

Driven by higher product prices and increased volumes, revenue surged 8% to $354.3 million over last year's quarter. Specialty eggs have been much in vogue since they cater to health-conscious consumers and are priced at a premium. As a result, the demand for specialty eggs has been one of the key drivers behind top line growth. Moreover, the price of specialty eggs has jumped 4.1% over last year.

One of the most important contributors of growth is the acquisition of egg producer Maxim Production last year, which has largely helped Cal-Maine in revenue growth. However, this is not the first time that the egg producer has tried to expand through the acquisition of other businesses. It has also acquired commercial egg assets of Pilgrim's Pride Corporation (NASDAQ: PPC ) , which specializes in chicken production; this expanded Cal-Maine's footprint in Texas .

Pilgrim's Pride sold off its egg assets since it wanted to focus more on chicken products. Both the seller and the buyer benefited with the transaction. Pilgrim's stock price has increased 126.5% over the last year and has been performing well. In fact, the chicken provider's last quarter was a blockbuster one wherein its bottom line surged 265%. The company's cost-cutting measures paid off as it doubled its margin to 11% over last year .

Moving to the bottom line, the shell egg producer's earnings jumped a whopping 80% over last year to $1.08 per share. Earnings were mainly driven by higher sales as well as lower feed costs, which are expected to remain at the same level in the coming months. The increase in sales of specialty eggs also helped as they make up 23.7% of the total revenue.

Reasons to believe

Cal-Maine has been an excellent performer and is getting better with each passing quarter. Its strategy of expanding through acquisitions and focusing on specialty eggs has been quite fruitful, delivering reasons to believe in its growth prospects. The egg producer has also been able to reduce its debt in the last few years, reflecting the company's growth potential.

Its recent acquisitions should continue to expand its presence in the commercial eggs space, enhancing its capabilities as well as its total sales.

Even meat protein company Tyson Foods (NYSE: TSN ) has followed a similar strategy and has benefited much from it. It acquired two new businesses in February and June 2013, the advantages of which were reflected in its fourth-quarter results that were reported last month.

Tyson Foods' acquisition of Don Julio Foods and Circle Foods, along with higher chicken prices, helped revenue jump by 7% to $8.89 billion and earnings surge by 27% over last year. The buyouts basically strengthened the meat company's prepared foods segment and caused it to grow 5%. Even Cal-Maine is expected to reap the fruits of the acquisitions.

Cal-Maine Foods also provides organic and healthy eggs which carry a premium and is in high demand. Specialty eggs have high growth potential as its contribution to the total sales has been increasing. Moreover, it will help in expanding the margins. Therefore, concentrating on specialty eggs should prove to be advantageous.

Final words

Cal-Maine Foods has been performing well and its prospects look bright. It is the largest producer of eggs and is the leading industry player. As a result, it directly enjoys the benefits of an increase in egg demand and a decrease in feed costs. Eggs are also an important part of breakfast, so players in this industry should continue to shine.


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