The avian flu outbreak last year scrambled the profits of egg producers, leading them to take precautions to ensure that a similar outbreak can be contained easily. That required investments that seem to be paying off now. Let’s crack open the results at Cal-Maine Foods Inc. (CALM.O), the leading egg distributor in the U.S. with brands such as Land O’Lakes and Egg-Land’s Best.
The Jackson, Miss.-based company manages about 42 million chickens and in fiscal 2014 sold about one billion dozen shell eggs, or 23 percent of domestic consumption. It has also invested in specialty products and is now selling organic, all natural, cage-free, vegetarian and omega-3 eggs.
Grain prices have been rising, which affects chicken feed, but egg prices have also gone up, more than compensating for the rise in grain prices. Cal-Maine Foods is exhibiting strong earnings quality, and based on the StarMine Earnings Quality score of 91, it looks like the earnings are backed by strong fundamentals, the yolk of any balance sheet.
Source: Eikon/StarMine
Laying a strong base
Return on net operating assets is one measure of operating efficiency. By this measure, Cal-Maine has done very well. Trailing 4Q return on net operating assets has reached an all time high of 84%, far above the industry median. That efficiency has been driven by improving operating margins and net operating asset turnover. What’s most impressive is that asset turnover is at 3.7, an all time high and almost double the industry median. This financial ratio measures how efficiently a company is using its assets to generate revenues and strength in this ratio typically means that earnings are likely to be sustainable.
Source: Eikon/StarMine
Cash flow over easy
Cal-Maine has been generating positive cash flow from operations, and in the last quarter, it generated cash flow from operations of $154 million, the highest in more than five years. Those strong cash flows are more than adequate to fund investments in organic growth and precautionary measures to curtail another outbreak of avian flu. With migrating birds taking flight, this is the season for the disease, and it remains to be seen if these measures help Cal-Maine this year. It’s encouraging that these investments are being funded by cash from operations and the increase in cash on the balance sheet means that dividend payments/buybacks are likely to remain strong. Strong cash flows are a sign of good earnings quality.
Source: Eikon/StarMine
Golden egg
Cal-Maine scores highly on almost every StarMine model, whether it be momentum or valuation based. In fact, on the most comprehensive Value-Momentum model that takes both valuation and momentum into consideration, the company scores a 99 out of a possible 100, putting it atop its peers. The only model that Cal-Maine scores poorly on is the Short Interest model. Maybe the shorts are hedging for a major outbreak of avian flu.
Source: Eikon/StarMine
Cheap, cheap
In the last quarter, though demonstrating strong results, the company reported an earnings miss as analyst expectations were too optimistic. The stock was down more than 11% immediately following the earnings miss and now looks cheap according to the StarMine valuation models.
It trades at a forward P/E of 5.7 compared to its five-year median of 13.5. While investors may look for instant gratification from quarterly earnings, it looks like Cal-Maine earnings are backed by good fundamentals and could remain strong. Cal-Maine’s push into specialty eggs, one of the fastest growing areas, means that it may harvest higher margins and profits in the coming quarters. In addition, the upcoming holiday season usually sees a big boost in egg demand. Pass the eggnog and let’s bake some cookies.
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