Has Cal-Maine Foods Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Cal-Maine Foods (Nasdaq: CALM  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Cal-Maine Foods.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 11.5% Fail
  1-Year Revenue Growth > 12% 14.7% Pass
Margins Gross Margin > 35% 18.5% Fail
  Net Margin > 15% 8.4% Fail
Balance Sheet Debt to Equity < 50% 15.1% Pass
  Current Ratio > 1.3 3.41 Pass
Opportunities Return on Equity > 15% 21.2% Pass
Valuation Normalized P/E < 20 16.43 Pass
Dividends Current Yield > 2% 2.7%* Pass
  5-Year Dividend Growth > 10% 89.1% Pass
       
  Total Score   7 out of 10

Source: S&P Capital IQ. Total score = number of passes. *Based on trailing dividends.

Since we looked at Cal-Maine Foods last year, the company has seen its score jump by three points. A big jump in its dividend, along with improving sales growth and returns on equity, helped push the score higher. Shareholders are also happy, with the stock having gained about 50% over the past year.

As an egg producer, Cal-Maine has had to deal with a tough environment for agricultural companies that rely on grains for feed. Rising feed prices have hampered margins at meat producers Pilgrim's Pride (NYSE: PPC  ) and Tyson Foods (NYSE: TSN  ) , and egg producers aren't immune from that trend. Fortunately, Cal-Maine has been successful passing on many of those higher costs to consumers.

Cal-Maine and its peers have also taken other steps to boost those margins. In particular, Dean Foods (NYSE: DF  ) has its organic WhiteWave-Alpro dairy brand, which has grown at a much faster pace than its traditional dairy business, following the same game plan that has vaulted Whole Foods Market (Nasdaq: WFM  ) to such success in cultivating customers who want food of the highest quality. Similarly, Cal-Maine has moved into specialty egg sales, including both organics and cage-free eggs. Because demand for specialty eggs is more stable than that for conventional eggs, selling more of them could help Cal-Maine make its financial results less cyclical.

Cal-Maine is unusual among U.S. companies in that it pays variable dividends. Lately, that has been a positive for the company, with strong earnings leading to bigger payouts. But if the good times end, then shareholders will suffer the double-hit of dividend reductions as well as possible share-price declines.

For Cal-Maine to keep improving, it needs to keep those earnings up while continuing to focus on sales growth. It may never get margins high enough to reach perfection, but it could still deliver strong returns and dividend income for your portfolio.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Can specialty eggs keep boosting Cal-Maine Foods higher? You may find the answer from looking more closely at food retail trends. Check out the Fool's premium report on Whole Foods to learn more about interest in organics and natural foods that have helped results not just for the grocer but for its suppliers as well. For in-depth analysis and free updates, click here and get in the know today.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Whole Foods and Dean Foods. Motley Fool newsletter services have recommended buying shares of Whole Foods. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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