While the recently ended first quarter at Cal-Maine Foods (CALM 0.59%) wasn't its best ever, it was nonetheless impressive given the record-high feed costs these past few months. It's no wonder the stock has four out of five stars on Motley Fool CAPS and is often lauded by myself and other Fools. But the stock is near an all-time high and the company also warned that feed costs will remain high for the rest of the fiscal year, raising the question: Is there still growth ahead?
The ugly duckling
Regular readers are probably well aware of my beef with poultry companies. Because meat prices are set more by market forces than by individual producers, these companies are powerless to raise prices when their cost inputs go up. Cal-Maine isn't really any different. The company is a pure play on egg consumption, and egg prices basically follow the same rules as meat prices. Per capita egg consumption in the United States hasn't changed much over the last few decades. So where's the opportunity for growth?
The answer is twofold. The first part of Cal-Maine's strategy is to grow through acquisitions. Cal-Maine is the biggest player in the egg market, but it controls only about 18% market share. That leaves a lot of room to grow even if the industry itself is stagnant. To that end, Cal-Maine recently acquired all of the egg assets from Pilgrim's Pride (PPC 0.52%), the world's largest poultry company. The acquisition added 1.4 million egg-laying hens to Cal-Maine's production, about a 5% increase.
Companies in other industries will sometimes get dinged for using acquisitions to fuel growth, as it implies a lack of real demand for the company's product, and because acquisition-hungry companies will often overpay, leading to future writedowns. But by growing through acquisitions, Cal-Maine is able to increase its production without increasing production in the overall industry, which would have an adverse effect on egg prices. Furthermore, goodwill and other intangibles only account for 6.7% of total assets, a fairly conservative level.
The secret weapon
Cal-Maine's other growth strategy provides a fairly literal answer to detractors worried about its lack of organic growth. Cal-Maine gets basically all of its sales from conventional eggs and specialty eggs, which include organic, free range, and nutritionally enhanced eggs. While conventional egg consumption is pretty low-growth, specialty egg sales have been growing much faster.
Specialty eggs only accounted for about 15.2% of sales in 2007, versus 24% in the recently ended 2012 fiscal year. Lest you think that specialty eggs are simply cannibalizing non-specialty eggs, total sales have still been growing at close to 9% annually for the last five years. The company is committed to continuing to grow specialty eggs as a percent of revenue, owing to their price premium and relative price stability over regular eggs.
The growth in specialty eggs is clearly part of a broader trend in the food industry. It's no secret that premium grocer Whole Foods (WFM) has been running laps around conventional counterparts like Safeway (NYSE: SWY), with 55% sales growth over the last five years compared to essentially none. To be sure, Whole Foods runs a tighter ship, but it is also the poster child for the growing popularity of organic, healthy food. It's that same trend that recently led Dean Foods (DF) to announce the spinoff of its WhiteWave-Alpro division, which is best known for its Horizon Organic dairy brands and its Silk alternative milk products.
The Foolish bottom line
That all sounds great, but after climbing 21% since I flagged it as a top pick on CAPS, is the stock still a good value? In a word -- yes. At just 11 times earnings, the stock is cheap. The market is likely pricing in expectations of weaker quarters to come, in light of high feed costs, but I'm not particularly worried. In the most recent quarter, egg prices actually rose faster than feed prices, and they'll likely continue rising as we head into the important holiday season. This stock should continue rewarding investors for a long time to come.
If you're interested in the growth of organic and specialty foods, be sure to also check out the Fool's new special report on Whole Foods. It covers some key risks and opportunities for the company, and will be updated throughout the year. Click here to get started!
