Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Want to Invest in a Value Stock? Consider Buying Shares of This Food Producer

By Beth McKenna - Jan 9, 2021 at 1:37PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares of this egg producer are attractively valued relative to the company's projected long-term earnings growth.

By just about any traditional metric, the U.S. stock market is very frothy. As long as investors are willing to pay up big for stocks, so-called growth stocks could keep rising. However, when the momentum music stops, you probably don't want to be holding all growth stocks with nosebleed valuations. Even if you favor growth stocks, adding some value stocks could help balance your portfolio.

One value stock worth at least putting on your watch list is that of consumer staple company Cal-Maine Foods ( CALM -1.18% ), the largest producer and distributor of fresh shell eggs in the U.S.

Six brown-shelled eggs in a basket with a blue background.

Image source: Getty Images.

A losing stock since 2016, but a huge long-term winner

Let's kick things off with a long-term stock chart. Such a chart is more telling than merely listing stock returns for given time periods.

CALM Total Return Price Chart

Data by YCharts.

Cal-Maine's business 

Cal-Maine Foods produces and sells conventional and specialty fresh shell eggs under the Egg-Land's Best, Land O' Lakes, Farmhouse Eggs, and 4-Grain brands, and under private labels. Its specialty products include cage-free, organic, and nutritionally enhanced eggs. The Missouri-based company sells to grocery store chains, club stores, and food-service distributors primarily in the southwestern, southeastern, midwestern, and mid-Atlantic regions of the U.S.

Cal-Maine's specialty eggs business is powering its growth. Sales volumes for specialty eggs are growing faster than those for conventional eggs, and revenue is growing even faster since specialty eggs are higher priced. 

Sales of specialty eggs should continue to grow briskly for some time. In recent years, many major corporate egg buyers in the country have pledged to buy only cage-free eggs by a certain date. These include Walmart and other major supermarket chains. In addition, "a growing number of states have passed legislation requiring cage-free eggs by specified future dates," Cal-Maine CEO Dolph Baker said in the company's fiscal second-quarter 2021 earnings release on Tuesday.

The company, which has about a 19% share of the U.S. shell egg market, can also continue to grow through acquisitions. Since 1989, it has acquired 22 companies ranging in size from 160,000 egg layers to 7.5 million egg layers. Nonetheless, the industry is still quite fragmented. Quoting a 2020 survey by Egg Industry magazine, Cal-Maine says on its website that the 10 largest shell egg producers in the U.S. own about 54% of total industry egg layers.

In its fiscal second quarter, for the period ended Nov. 28, Cal-Maine's revenue jumped 11.5% year over year to $347.3 million. Growth was driven by a rise in shell egg prices and an increase in sales volumes to the retail channel, which was due to consumers eating more meals at home during the COVID-19 pandemic. However, demand from food-service customers "remains well below pre-pandemic levels, due in part to various restrictions on restaurants in place for different areas of the country," Baker said in the release.

For the quarter, the company reported net income of $12.2 million, or $0.25 per share, up from a net loss of $10.1 million, or $0.21 per share, for the year-ago period. This result crushed the Wall Street consensus estimate of a loss of $0.08 per share.

Cal-Maine stock's key stats 

Company

Market Cap

Price/Earnings (TTM)

Wall Street's Projected 5-Year Annualized EPS Growth

1-Year, 10-Year, and 20-Year Total Returns

Cal-Maine Foods

$1.9 billion

27.8

62%

0% / 216% / 3,830%

S&P 500

-- -- -- 19.8% / 270% / 338%

Data source: Finviz.com and YCharts. Data as of Jan. 8, 2021. TTM = trailing 12 month. EPS = earnings per share.

Cal-Maine stock is priced at 27.8 times its trailing 12-month earnings. That's an attractive valuation given that Wall Street analysts expect the company to grow earnings per share at an average annual rate of 62% over the next five years. Of course, there's no guarantee it will achieve this growth rate. That said, it has a good recent track record of surpassing the Street's bottom-line expectations.

As to Cal-Maine's financials, it has a solid balance sheet. It ended last quarter with cash and short-term investments of $179.1 million and it has no long-term debt.  

Variable dividend policy

Due to the unpredictability of the price of shell eggs, Cal-Maine pays a variable dividend. In each quarter that it reports a net income, it pays a dividend of one-third of the quarterly income with the following caveat: Following a quarter for which it does not report net income, it will not pay a dividend until it's profitable on a cumulative basis computed from the date of the last quarter for which a dividend was paid.

CALM Dividend Yield Chart

Data by YCharts.

This dividend policy means the stock isn't a fit for investors who want a dependable income stream. However, the stock could be a good choice for investors whose main goal is total capital appreciation. The company's dividend has been quite juicy at times. As recently as 2016, the dividend yield was more than 6%, and in 2009 it peaked at over 10%. Moreover, the reinvested dividend makes up a whopping 30% of the stock's total return over the last 20 years.

Consumers love eggs

Investors shouldn't need to concern themselves about demand declining for eggs. The vast majority of consumers eat eggs and that's not going to change, in my opinion. Sure, plant-based foods are gaining steam and people are eating less meat. But vegans, or those who don't eat any animal products, are still quite rare (an estimated 2% to 3% of the U.S. population) and that seems unlikely to change much over the long term.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Cal-Maine Foods, Inc. Stock Quote
Cal-Maine Foods, Inc.
CALM
$36.06 (-1.18%) $0.43
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$140.63 (-1.40%) $-2.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
673%
 
S&P 500 Returns
142%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.