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.
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.
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