When your stock sells for 4.6 times trailing earnings, what do you do? Cal-Maine Foods (NASDAQ:CALM), the largest egg processor in the U.S., decided it was time to repurchase its own shares.
Cal-Maine, during its un-golden years, traded sideways. In fact, the stock did not see the equivalent of $5 a share until late in 2003 -- before pecking its way quickly to $22.80 a share and being labeled by this reporter as having "flown the coup."
Cal-Maine, which closed at $11.51 yesterday, has transformed its balance sheet since egg prices hit 20-year highs in 2003. As Brian Gorman noted, "The company has increased its cash holdings to $73 million from $6 million and reduced long-term debt to $80 million from $96 million." The company is the modern version of the goose that laid the golden egg -- although we are talking chickens here.
Owning a golden goose is great. Knowing how to manage that goose is the key -- and Cal-Maine clearly did that when it canceled a stock offering in April. Why sell at bargain price-to-earnings levels? Better yet, at today's prices, why not buy what you know best -- your own company!
For those, like me, who say, "Eggs are a commodity business" -- you are right. But consider that while heavyweights such as General Mills (NYSE:GIS) and Kraft Foods (NYSE:KFT) have had little success trying to catch the low-carbohydrate food craze, Cal-Maine was already in the right place with its golden eggs. It didn't need to invest millions like Anheuser-Busch (NYSE:BUD), Coca-Cola (NYSE:KO), and PepsiCo (NYSE:PEP), tailoring its product to changing consumer tastes.
Also gone is the image that eggs are not healthy. Eggs are a commodity, but, when egg production gets back in step with demand, demand will be at elevated levels.
Cal-Maine grew to its No. 1 position by acquisition. With 64 producers with 1 million or more layers, there are plenty of opportunities for Cal-Maine to use its cash (and the market's low valuation of egg producers) to make accretive acquisitions. For now, it makes more sense (and cents too) to buy its own stock.
Cal-Maine has approval to buy approximately 10% of its shares on the open market. With egg demand still strong, 2005 looks like another good year -- just not as golden as 2004.
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Fool contributor W.D. Crotty owns stock in PepsiCo. W.D. Crotty also has three hens and a rooster keeping egg costs down and the lawn bug-free.
