Cal-Maine Foods (CALM, Financial) produces, grades, packages, markets and distributes shell eggs. The company is the largest producer and marketer of shell eggs in the United States with sales of $1.6 billion for FY15. For YTD15, Cal-Maine Foods has trended higher by 26.2% and the stock has more upside.
Before talking about any other factor, let's focus on the company’s balance sheet. Cal-Maine Foods had debt of $43 million as of 1Q 2016. For the same period, the company had $69 million in cash, making Cal-Maine Foods net debt free. Cal-Maine Foods has made 18 acquisitions since 1989 and the company’s key expansion strategy has been inorganic. This strategy for growth will continue with the company’s latest presentation highlighting the fact that there are 50 to 60 top egg producers in the U.S. that can be potential acquisition targets. With high financial flexibility, Cal-Maine Foods is well positioned to make mid-size or large-size acquisitions.
For the near term, a factor that will deliver strong results for Cal-Maine Foods is the avian influenza outbreak in the upper Midwestern United States with more than 40 million laying hens and pullets affected. This has resulted in a 13% reduction in the national laying flock and has boosted egg prices for the foreseeable future. If the company’s first quarter result is analyzed, sales for 1Q 2016 surged by 70.9% as compared to 1Q 2015, and this was primarily due to an increase in egg price (per dozen) to $2.243 from $1.354 in the prior-year comparable quarter. The outbreak of influenza in the industry is a risk as well as an opportunity (depending on region of operation). In the current scenario, it has boosted the company’s sales and cash flow.
Steady growth in sales that has been driven by gradually increasing egg prices and inorganic growth strategy is one factor that will keep sentiments positive for Cal-Maine Foods. Besides this, the company’s focus on value-added speciality egg business will drive EPS growth and stock upside. The value-added business includes nutritionally enhanced eggs, cage-free and organic eggs. For 1Q 2016, this segment constituted 24.5% of dozens sold and 27.1% of sales revenue. In terms of dozens sold, the number has increased from 132 million in FY11 to 211 million in FY15. Therefore, the trend is positive and this will positively boost the company’s EBITDA margin and cash flow.
An important point from a shareholder value creation perspective is that Cal-Maine Foods has a variable dividend policy, and higher dividends can be expected in the coming quarters as higher egg prices boost cash flows. While the company’s dividend for 4Q 2015 was 31.7 cents, it surged to 98.3 cents in 1Q 2016, and dividends should remain high for the coming quarter. The following management comment in 1Q16 underscores my point on high cash flow and dividends.
"Our industry is still feeling the effects of the substantial reduction in the national laying hen flock that occurred this past spring related to the avian Influenza outbreaks in the upper Midwestern United States. We believe that egg prices will remain very high until the supply situation returns to more normal levels."
As egg prices remain “very high,” the company’s dividend will stay at higher levels in the foreseeable future.
Amid the positives, the influenza outbreak is a key risk when it comes to exposure to Cal-Maine Foods. The company has strengthened bio security measures at all facilities, and this should help offset the risk to some extent.
Overall, Cal-Maine Foods is an attractive investment even after 26% rally in YTD 2015. From YTD 2015 high of $63, the stock has corrected to current levels of $49, and this correction is a good buying opportunity. While dividends can be volatile, the stock is a potential long-term value creator through sustained growth.
Disclosure: No positions in the stock
