Lately, I've been working on rejiggering my CAPS portfolio and promoting some of my current CAPScalls to top pick status. Next up is Cal-Maine Foods
Not all it's cracked up to be?
Cal-Maine lacks one of the main features I look for in a business -- diversification. I like Brasil Foods
Cal-Maine has neither of these features. It is a pure play on egg consumption in the United States, which isn't exactly the hottest growth industry right now. In fact, per capita egg consumption in the United States has stayed pretty much the same for the last few decades.
Investing in the fertile fields of growth
So why do I like Cal-Maine if it's focused solely on a stagnant industry? Because it still has a few tricks up its sleeve. For starters, the egg industry is highly fragmented. Cal-Maine is the largest producer but only controls about 18% of the entire market, so there is still ample opportunity for Cal-Maine to grow through consolidation.
Another part of Cal-Maine's strategy is to focus on where the growth is. According to the Organic Trade Association's 2011 industry survey, organic food sales have grown at about 13.4% annually for the past nine years. Cal-Maine's specialty egg sales include other things besides organic eggs -- such as cage-free eggs -- but they still benefit from the same tailwind.
The trend can be most easily spotted at Dean Foods
Cal-Maine is tapping into that same source of growth. The company doesn't break its sales into segments, but in 2006, specialty eggs represented only 14% of sales, and in 2011 they had grown to 24%. In addition to the growth prospects, specialty eggs tend to have a higher and less cyclical price than conventional eggs, which should help to stabilize Cal-Maine's rather erratic gross margin as the segment becomes a bigger part of sales.
The Foolish bottom line
It should be noted that the food industry is highly cyclical, and its profitability depends on the cyclical nature of input costs. Fellow poultry producers have been having a terrible time recently contending with a downturn in poultry selling prices and a surge in the cost of corn and soy for feed.
Even the venerable Tyson Foods
Cal-Maine, however, is. It boasts one of the lowest EV-free-cash-flow ratios in the industry, as well as one of the highest dividend yields. The market is pricing this stock as if it's just another chicken running around with its head cut off. I don't think that's true. I think Cal-Maine is a cheap stock with a lot of growth ahead of it, and so I'm flagging it as one of my CAPScall top picks.
Add these companies to My Watchlist to stay updated as the chicks start to hatch.