This Hidden Gem's Acquisitions Are Paying Off

Cal-Maine Foods (NASDAQ: CALM  ) lived up to its ticker Monday, calming investors who may have grown anxious after two quarters of falling income growth, the first of which even included an outright loss. In its recent second quarter, Cal-Maine reported net income of $26.1 million on revenues of $354.3 million, a staggering 83 percent income growth and 8 percent sales growth, beating analysts' expectations.

If this sounds impressive, a few caveats should be given. First, Cal-Maine is a pure play on the egg market, and as such it is exposed to fluctuations in both egg prices and the price of chicken feed (mostly comprised of corn and soy prices). Both of these are prone to a lot of volatility, and as such, Cal-Maine's sales and income growth are also notoriously lumpy.

CALM Revenue and Net Income (Quarterly YoY Growth) Chart

CALM Revenue and Net Income (Quarterly YoY Growth) data by YCharts.

The other thing to realize is that Cal-Maine's sales growth comes largely from two strategies. The first is increasing sales of "specialty eggs." These are products like organic or free range eggs, and they tend to carry higher and more stable prices, so selling more of them as a percent of total sales not only increases gross margin, but can smooth out some of the lumpiness in earnings. In fiscal 2013, specialty eggs accounted for just 16.4 percent of eggs sold, but 23.7 percent of total revenue. In 2008, specialty eggs accounted for 12 percent of eggs sold and 14 percent of total revenue, so the strategy seems to be working.

The second part of Cal-Maine's growth strategy is through acquisitions. Normally I would disparage a company that prefers to grow through acquisitions rather than through its own internal growth, but in this case, it's simply a necessity. In the 30 years from 1975 to 2005, per capita egg consumption in the United States fell about 7 percent. Total consumption continues to grow with the population, but it isn't as if there are oophagous hordes pouring daily into the country.

Fortunately, the egg industry is highly fragmented, with the top 10 producers only controlling about 51 percent of the market. Cal-Maine, the top producer, itself only controls about 21 percent of the market, so there is still room for growth through strategic acquisitions. Compare this to Dean Foods, which operates in the zero-growth milk industry but already controls 40 percent of the market, too much to continue growing meaningfully through acquisitions. Dean consolidated the milk market in just a few years during the 1990s, and has had little growth since, whereas Cal-Maine has had the foresight to pace its buying.

The Foolish bottom line
Putting together the volatility of Cal-Maine's commodities and its penchant for acquisitions, this most recent quarter's results make a bit more sense. Feed costs were down significantly during the quarter as farmers managed to harvest a record corn crop, and egg prices were a hair's-breadth higher.

Results were also meaningfully affected by Cal-Maine's late-2012 acquisition of Maxim Production's egg assets. Excluding the acquisition, sales would have only increased 1.6 percent.

A purist might discount the company's growth this quarter for the above reasons, but as long as Cal-Maine's strategy keeps paying off, I have no complaints.

More from the Fool
If all those fluctuating eggs make you queasy, The Motley Fool's chief investment officer has recently selected his No. 1 stock for 2014, and it's one that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2780051, ~/Articles/ArticleHandler.aspx, 4/20/2014 5:11:28 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement