Despite a Long Run, Cal-Maine Has More to Go

Though its profits soared more than 80%, egg producer and seller Cal-Maine Foods (NASDAQ: CALM  ) fell short of analyst estimates on both the top and bottom lines. Specialty eggs, which can be organic, cage-free, nutritionally enhanced, and otherwise, led the charge and now account for nearly one quarter of the company's total shell-egg sales -- in line with the major trends in the fresh-food industries. Though the company didn't hit the predicted numbers, the future remains bright as feed costs recover from historical highs and allow the company's margins to flourish. The nation's largest producer and distributor of shell eggs is one that can fit the taste of many an investor.

Egg-celence
No one likes an egg pun, but Cal-Maine had nothing but strong numbers to show investors when it released earnings last week. In the company's fiscal 2014 second quarter, sales grew 8% to $354.3 million, up from $328.9 million in the year ago quarter. As mentioned above, Specialty Eggs remain the high growth segment within the company, now representing more than 16% of dozens sold and 23.7% of total shell-egg sales.

The Specialty Eggs, similar to other health-oriented alternative foods, command higher prices and are less cyclical in their sales volume. For mature food companies, the segment brings new life. Average prices for the segment grew more than 4% during the quarter.

Investors should note that much of the sales growth during the quarter came from Cal-Maine's recent acquisition of the Maxim Production Co. The commercial egg company added more than 6% to total sales, and when excluded from Cal-Maine's results, the company would have shown a net decrease in total dozens sold.

On the bottom line, the results shined their brightest with earnings of $1.08 per diluted share, compared to $0.60 per share in the year ago quarter, representing an 83% gain.

Sizzlin'
The key here is the Specialty Eggs segment, if that was not already clear. Conventional egg sales should remain relatively stable along with feed costs, but they alone do not justify Cal-Maine's 16 times forward-earnings ratio.

Even before the sudden rush of fancy egg sales, though, management was making the right moves in managing costs and gaining market share. In five years, the stock is up more than 100%. In 10 years, it's up more than 2,600%. Yes, you read that right: 2,600%. It's not quite that eggs became the coolest thing since sliced bread, but that the company had suffered from terrible market prices. While the industry broadly suffered, Cal-Maine quietly bought up regional players and created an 800-pound gorilla. When prices turned around, the company was primed to soar.

Those days of outrageous growth may be over, but this is largely the same management team. While egg prices haven't been too brutal lately, feed costs remain high. Estimating when that will fix itself isn't a wise game to play, but investors should keep in mind that feed prices, like many things, are cyclical. Over the coming years, costs should return to normalized levels and Cal-Maine's market prowess should continue to shine brighter than its peers -- especially in the Specialty segment.

At 16 times earnings, this stock isn't a bargain, but investors aren't paying a tremendous premium either. With the added bonus of a $0.36 per share dividend, Cal-Maine is an attractive growth pick in the business of food manufacturing.

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