Smashing Egg Results

Egg prices are firming, and the news has sent the stock of the U.S.'s largest egg producer -- Cal-Maine Foods (Nasdaq: CALM  ) -- soaring. The stock was up as much as 15.7% in early morning trading.

Today Cal-Maine is reporting second-quarter results (which ended Nov. 26). Unfortunately, the company did not break out results so investors could separate organic growth from the recently acquired 51% interest in Hillandale Farms -- a large Florida-based egg producer that increased Cal-Maine's overall production by roughly 30%.

Still, the news is excellent. Sales increased 58% over the comparable quarter last year. The company's net loss decreased from $0.23 to $0.03 a share.

While a loss is certainly not something to cackle about, what caught investors' attention was that the second quarter started slow and firmed only during the three weeks before Thanksgiving. Since then (which is the next quarter), "Egg demand has been excellent, resulting in higher egg prices." And while clothing retailers hate to hear about the frosty weather, Cal-Maine shareholders love that "cold, snowy weather in much of the country added to strong seasonal holiday demand."

The good news doesn't stop there. The corn and soybean crops are both large, so feed costs are projected to be favorable in the upcoming months.

So, is Cal-Maine a buy? In this observer's opinion, no. Why not?

Eggs are a commodity. Nothing shows the up and down cycle better than this five-year chart of the company's stock. The stock climbed wildly in late 2003 when the Atkins and South Beach diets were the craze, and stocks such as MGP Ingredients (Nasdaq: MGPI  ) and John B. Sanfilippo & Son (Nasdaq: JBSS  ) were the hot cocktail party names. When the diet fad crested, supplies grew and these stocks faded fast.

It has taken time, but the supply-demand dynamics for eggs is back in balance, and Cal-Maine is finally able to report better results. Investors interested in this stock should notice that the recently acquired Hillandale Farms helped drive the company's long-term debt to $100.8 million. That's a big number when you consider operating profits of $1.1 million this quarter will most likely be smaller than the interest expense on its debt. The company needs to see firm egg prices for a long time -- which is hardly a given -- to make this observer comfortable with that debt level.

The stock has already lost almost half its early-morning gain. That makes sense. Until it becomes clear that the company can turn its market-leading position into long-term profitability, the stock will swing wildly with the price of eggs.

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Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Click here to see The Motley Fool's disclosure policy.