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Is Cal-Maine Worth Owning Right Now?

Cal-Maine Foods (NASDAQ: CALM  ) reported earnings Tuesday, beating analyst estimates by a huge 26%. Only two analysts cover the small-cap egg producer, but it was nonetheless a great quarter. Revenue grew 10% while net income jumped 39%, helped along by higher selling prices and lower feed costs. The news sent Cal-Maine's stock to a new all-time high, though, raising the question: Cal-Maine is a great company, but is it a great stock right now?

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Cal-Maine operates in a very difficult industry, one that makes its CALM ticker somewhat ironic. One problem it faces is a simple lack of growth. From 1984 to 2012, per-capita egg consumption in the U.S. fell about 4%. Even if the industry manages to hold consumption steady, that still only gives it a growth rate equal to the population growth rate, about 1% annually.

Another problem is that the company is extremely sensitive to egg and feed prices. This means Cal-Maine's earnings, and its stock price, can be pretty volatile.

CALM Chart

CALM data. Source: YCharts.

That said, Cal-Maine rides these rough waves admirably. While growth in the industry may be low, Cal-Maine is still able to grow through acquisitions. It currently only makes up about 21% of the egg industry, and the 10 largest producers only make up about half of the market. Though it won't last forever, Cal-Maine has a lot of opportunity to acquire smaller competitors to continue to grow in an otherwise slow industry.

In fact, during the quarter, the company completed an acquisition, adding about 1.6 million hens to its operations. The extra capacity from the acquisition, as well as planned expansions to its existing facilities, will help it meet demand, which was so high during the quarter that it had to sacrifice gross margin to purchase eggs in the open market.

On the upside, Cal-Maine has been focusing more on "specialty eggs," which includes cage-free and organic eggs, and makes up about 24% of the company's sales. This category is where the real growth is. According to the Organic Trade Association's 2013 Industry Survey, total organic food sales increased by 10.2% in 2012, compared to just 3.7% for conventional food. That's the kind of tailwind that pushed companies like Whole Foods and WhiteWave Foods (NYSE: WWAV  ) to 10% and 11% sales growth in their most recently reported quarters.

WhiteWave makes an especially good comparison for Cal-Maine because it was recently spun off from Dean Foods (NYSE: DF  ) , the nation's largest milk producer. Milk consumption has fared worse than egg consumption over the last few decades, but WhiteWave, with its specialty products like Silk, has been able to take advantage of the growing organic market, while Dean is struggling with declining sales.

But at what price?
All this is great, but is Cal-Maine's stock worth buying right now?

In terms of valuation, it has an enterprise value-to-EBITDA ratio of 12.5. That's reasonable, but it's certainly giving the company a premium over other poultry companies.


CALM EV to EBITDA (TTM) data. Source: YCharts.

However, Tyson Foods (NYSE: TSN  ) and Pilgrim's Pride (NASDAQ: PPC  ) aren't necessarily perfect comparisons. While they share many of the same costs of raising chickens, Tyson and Pilgrim's Pride ultimately sell meat, which has different economics from the egg business.

Cal-Maine also has a healthy dividend, currently close to 4%. But there are caveats here, too. Cal-Maine has a very conservative dividend policy, which states that it will pay out one-third of net income each quarter, and if the company takes a loss during a quarter, there won't be a dividend during the next profitable quarter until it is profitable on a cumulative basis. That's a long-winded way of saying the dividend fluctuates constantly and sometimes disappears completely. Fortunately, the dividend has only been suspended for two quarters since the policy was put in place, and the yield has averaged about 3% for the last five years.

Given the strong business, relatively cheap valuation, and healthy dividend, I believe Cal-Maine is worth owning at this price.

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Jacob Roche

Jacob Roche is a California native and alumnus of UC Davis. His focus is mainly on agriculture stocks and anything tangentially related.

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