I recently cracked open some eggs and made a blueberry omelet. It was delicious, quick to prepare, and, arguably, quite nutritious. What's not to like (assuming you're not a vegan)?
"The rising cost of eggs," you might be thinking. Indeed, the retail price for a dozen eggs rose an average of 11.2% across the country between March 2021 and March 2022, according to the government's most recent Consumer Price Index release, and it seems likely the April release will show a much larger annual increase. Food prices overall were up by 8.8% over that period.
Eggs have been subject to the same inflationary pressures affecting most grocery items -- namely, pandemic-driven global supply chain issues. They've also recently risen in price for another reason: the worst U.S. outbreak of highly pathogenic avian influenza -- aka, "bird flu" -- since 2015. The current outbreak, which was first detected in February on a farm in Indiana, has been rapidly spreading in chicken and turkey flocks across the country. And when the illness is detected in a farm's flock, that entire flock is culled. As of April 6, this bird flu outbreak and the measures taken to contain it had decreased the country's table egg-layer flock by about 5%, according to the U.S. Department of Agriculture's mid-April update. That percentage is poised to rise, perhaps sharply.
Eggs are a consumer staple, so most folks don't cut back on them -- at least not much -- when prices rise. As for demand, it's been on the uptrend. Americans ate an average of 286.5 eggs each in 2020, up 18% in a decade, according to Statista.
This supply-demand scenario is not a positive for consumers. But it can transform into something far more palate-pleasing if you swap out your chef's hat (or toque) for your investor's hat. As of Thursday's close, shares of Cal-Maine Foods (CALM 2.80%), the largest producer and distributor of fresh shell eggs in the U.S., have returned 49.6% year to date. The S&P 500 and Nasdaq indexes (including dividends) are down 9.7% and 17.6%, respectively, over this period.
Cal-Maine stock has the potential to continue to be a long-term winner, but it's only suitable for investors who are comfortable with volatility. Let's do with this stock what I recently did with that blueberry omelet: Dig in.
Cal-Maine's business and catalysts for growth
Cal-Maine Foods produces and sells conventional and specialty fresh shell eggs under such top brands as Egg-Land's Best and Land O' Lakes, as well as under private labels. Its specialty products include cage-free and organic eggs, among others. Its customers are retailers and food-service distributors across the U.S. Southwest, Southeast, Midwest, and Mid-Atlantic regions.
The Mississippi-based company was founded in the 1950s and went public in 1996. It has been growing both organically and by acquisitions. From 1989 through its fiscal 2021 (which ended in May 2021), it made 22 acquisitions. As of its November 2020 investor presentation, it controlled a 19% share of the U.S. shell egg market.
Cal-Maine has several potential growth catalysts. First, it could continue to grow through acquisitions. The U.S. shell egg industry remains quite fragmented, as there are many smaller egg farms across the country. Cal-Maine's status as the industry leader makes it best positioned to scoop up desirable operations. And the bigger it gets, the more it should benefit from economies of scale.
Moreover, the company's financial resources put it in the catbird seat with respect to expanding its production of cage-free eggs. Not only has consumer demand been growing for cage-free and other specialty eggs, but U.S. states have increasingly been passing legislation requiring all eggs sold within their borders to be laid by hens living in cage-free conditions or better by a certain date. ("Better" in this case refers to free-range and pasture-raised conditions.) In addition, many large corporate egg buyers -- such as Walmart and McDonald's -- have set target dates for their transitions to 100% cage-free supply chains.
Lastly, the current bird flu outbreak has the potential to be a positive for Cal-Maine in another way besides pushing up egg prices. It could drive some owners of smaller egg-producing operations to sell their businesses. It's expensive to implement the measures necessary to help prevent these outbreaks and control the damage from them. Smaller operators may not have the financial resources to easily absorb those costs.
The frequency and geographic spread of bird flu outbreaks have increased following the emergence of a specific viral lineage in 1996, according to a recent literature review article in The Journal of Wildlife Management. There's no good reason to believe that this trend won't continue. More frequent and severe bird flu outbreaks would likely accelerate consolidation in the egg farming industry.
Financials and stock stats
In Cal-Maine's fiscal 2022 Q3, which ended Feb. 26, its revenue jumped 33% year over year to $477.5 million. Specialty eggs -- which are more profitable for the company than conventional eggs -- accounted for 39% of total revenue. Revenue growth was driven by a 29% surge in the average selling price the company received for its eggs, along with a 3% increase in sales volume. Net income was $39.5 million, or $0.81 per share, up 189% from $0.28 per share in the year-ago period.
|Company||Market Cap||Dividend||P/E Ratio
|Analysts' 5-Year Annualized EPS Growth Projection|
|Cal-Maine Foods||$2.8 billion||Variable dividend policy||147||27.1||245%|
Cal-Maine pays a quarterly dividend equal to one-third of its GAAP net income from the previous quarter. So following a quarter in which it does not report net income attributable to its business, 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."
Cal-Maine stock sports an attractive valuation from a P/E standpoint for a stock that Wall Street expects to grow earnings per share at an average annualized rate of 245% over the next five years. This is deep value stock territory.
The stock is priced cheaply largely because shell egg prices tend to be volatile, which makes it a riskier-than-average investment, at least over the short and medium terms. In addition, the market hates uncertainty, and this bird flu outbreak creates a lot of it. While Cal-Maine has yet to report an outbreak on any of its farms, it's certainly possible that a portion -- even a large portion -- of its egg-laying flock could be affected.
Cal-Maine stock may not be a good fit for all investors' portfolios, but for risk-tolerant investors who truly have long-term investing horizons, it's well worth considering.