Egg producer Cal-Maine (CALM, Financial) represents a business that sells a product that is part of the classic American diet. Currently the company is trading at a steep 18% discount to its 52 week high due to concerns about possible waning demand and increased regulations. However, this may represent an excellent opportunity to add Cal-Maine to your long-term portfolio. Let’s take a closer look.
Company and history
Cal-Maine was founded in 1957 in Jackson, Mississippi, according to its latest investor slide presentation. The company’s aim is to expand by increasing demand and through acquisitions. Cal-Maine acquired 18 companies since 1989 and went public in 1996 on the NASDAQ. The company currently commands 23% of the U.S. egg market. Cal-Maine’s current customer base is comprised largely of retailing chains, which represents 85% of its business. Food Service represents another 11% of its revenue base. The top three clients include Wal-Mart Stores (WMT, Financial), H.E. Butt Company and Publix Super Markets.
Obviously eggs are what Cal-Maine is all about. More specifically, the company sells the typical “non-specialty shell eggs” and “specialty shell eggs” that include organic eggs, which represents a real positive in the minds of the health conscious consumer. Cal-Maine also sells eggs through co-pack agreements with other producers. Interestingly, though less significant to Cal-Maine’s business, the company also has an “other” segment that includes hatching eggs and hard cooked eggs.
Cal-Maine sets itself apart in the commoditized egg world by selling eggs under owned brands such as Rio Grande, Farmhouse, Sunups, 4Grain and Sunny Meadow. Cal-Maine also sells brands in certain areas of the country under license such as Land O’ Lakes and Egg-Land’s Best.
Cal-Maine’s revenue, net income and free cash flow can fluctuate based on supply, demand and prices (see chart below). However, the company exhibits financial prudence by maintaining a rock solid balance sheet. In the most recent quarter, Cal-Maine had cash and investments amounting to $238 million representing a whopping 35% of stockholder’s equity. Its long-term debt only amounted 6% of stockholder’s equity. One of the ways Cal-Maine achieves fiscal prudence is by adhering to a variable dividend policy—it only pays out 1/3 of its quarterly net income. Cal-Maine’s prudence has gotten the company through tough times in the past and will likely do so in the future.
Cal-Maine is headed by Adolphus B. Baker who is currently the President, Chief Executive Officer and Chairman of the Board of Directors, according to Cal-Maine’s investor relations website. He is the son-in-law of Fred R. Adams, Jr. who is the Chairman Emeritus of Cal-Maine and served as CEO from the company’s founding in 1969 until October 2010. These two executives own significant stakes in the company and control 67% of the voting power. They also own 29% of the common stock outstanding, meaning their interests are aligned with shareholders at large.
Cal-Maine trades at an extraordinarily low P/E ratio of 13 versus 20 for the S&P 500 and 15 for Cal-Maine’s five year average (chart below). This gives the prospective investor a low amount of stock market price risk combined with the medium fundamental risk highlighted above.
Cal-Maine has seen demand and price drop before. There is always a risk that the next egg downturn will be deep and extended which could lead to prolonged losses resulting in the suspension of dividends and butchering Cal-Maine’s balance sheet in the process. While it seems highly unlikely, if a downturn lasted long enough it’s conceivable that Cal-Maine could descend into bankruptcy.
Cal-Maine remains committed to expanding its market presence. Recently the company entered a joint venture with Rose Acre Farms, which is the second largest egg producer the U.S. The joint venture will be called Red River Valley Egg Farm, LLC and the entity will commit to building an egg facility in Red River County, Texas. This relationship could lead to the merger of the two companies further enhancing Cal-Maine’s market power. Also, strong demand for Cal-Maine’s organic specialty eggs should prove as a stable catalyst for Cal-Maine’s top and bottom lines. Overall, egg demand shows no sign of letting up.
Finally, Cal-Maine is committed to utilizing state of the art technologies and processes to enhance company efficiency. Given Cal-Maine’s growth prospects, commitment to financial prudence, demonstrated intelligence in acquisitions and low valuations this company deserves a long-term spot in your portfolio.
William Bias (stockdissector) owns shares in Cal-Maine and Wal-Mart.