- Fantastic growth record for the past 5 years.
- Good management team focused on growth.
- Largest flock in the US (and the world) with stellar biosecurity record.
- Diversified brands and go-to-market.
- We forecast ~10% growth per annum going forward.
Cal-Maine Foods (NASDAQ:CALM) is a shining example of how a simple, single segment strategy can be a massive growth machine in the hands of the right team. Founded in 1957 and incorporated in 1969, the company has grown consistently to become the single largest egg producer on the planet - and it is poised for more of the same.
By the numbers
At the time of writing this, the share price is $57.71. This gives us the following valuation metrics on a TTM basis.
Given the position in the current economic cycle, with extreme valuations seeming to be the norm, I find the current valuations in the Food Products industry to be something of a relief. While I love a bargain, I do think these businesses (and CALM in particular) are being unfairly punished. Here's why.
- Over the past 5 years, the CALM team has managed to grow their business - both organically and through acquisition - while maintaining an incredible biosecurity record for the largest flock of layers on the planet. That is no small task and you don't have to look much further than its management team to understand how it has happened. These guys and gals are the true seasoned veterans of the poultry and egg world. They have made operational efficiency one of their key goals, and it shows.
There are 9 senior leadership members who have operations titles and come with over 100 years combined experience. It fascinates me to see a leadership team of 21 people for a single segment player. Some may say that this seems a little excessive or top-heavy, but I think it's through this varied and seasoned management team that they've steered their ever-growing ship through some pretty tough times for the industry.
When you start rattling off the numbers, it gets even more impressive. All CAGR numbers quoted are over the past 5 years using the TTM to Q1 as the 5th year. I know that this is slightly unorthodox, but it shows how its FY2016 is already shaping up compared to its record FY2015.
- Revenues have grown at 10% CAGR and 16.05% in the TTM
- Gross margins have expanded from 17.98% in 2012 to 31.58% in the TTM
- OpEx has only grown at 7.6% CAGR and 2% in the TTM
- Operating margin has grown from 7.8% in 2012 to 22.66% in the TTM
- Net margin has grown from 8% in 2012 to 15% in the TTM
So the company has grown the top, middle and bottom lines while keeping a pretty good cap on expenses.
Okay, that all looks fabulous, but what has driven all this growth? We'll get into that in a second... first, I'd like to look at some of the strategic aspects of this business that make it so appealing to me.
Cal-Maine handles operations end-to-end. From breeding, through to laying, produce, packaging, distribution and even feed manufacturing. This company has ensured its operations are top-notch and every aspect revolves around its single segment strategy - to sell eggs.
When it comes to distribution, I think the approach has been exemplary. It has varied distribution, geographic reach and go-to-market. Its top 10 customers make up roughly 70% of its sales dollars which is ideal for effective customer management - without putting too many of its proverbial 'eggs' in one basket.
It also offers a diverse set of specialty and non-specialty brands as well as selling its eggs to co-pack partners.
The almost 50m strong Cal-Maine flock is spread over nearly 50 locations across 15 states. Unfortunately, the breakdown of this is not entirely clear, but I do like the fact that it maintains several different breeding, laying, production and packaging facilities as this also helps mitigate risk.
While the details are scant around this point too, the very fact that it has managed to stay free of Avian Influenza through the recent outbreak is a testament to its focus on biosecurity and general flock health.
The management team is focused on using acquisitions to drive growth and, so far, this has been well executed and easily financed. As the company grows and the market consolidation continues, this will be harder and harder to maintain. That's why its organic growth strategy and operational focus are equally important when evaluating the business. Last year, organic accounted for 7.6% of the revenue growth while acquisition accounted for 4.2%. I think this is a healthy mix and, if it can be maintained, is an excellent recipe for continued growth.
A clear and simple dividend policy is something I can always appreciate. This one is pretty standard and easily financed. It simply states that 33% of net quarterly income will be paid to shareholders in the form of a dividend.
I think we've created a good picture of how the business is run today and why it's grown so impressively to date - but what is going to drive future growth?
(source: American Egg Board)
The end of egg paranoia is certainly going to help. Over the past year, the US market has started to consume more eggs again as the government changes its stance on eggs and consumption of cholesterol. On the whole, it looks like demand for eggs will rise - especially in the specialty segment as people return to an 'eggs are healthy and nutritious' stance. Furthermore, the population is forecast to grow at roughly 2% per year.
On the supply side, there has been a 13% reduction in the national flock due to Avian Influenza. So, while demand is rising, supply has been squeezed - playing into the hands of Cal-Maine and its healthy flock.
(source: American Egg Board)
The profitability of the egg industry as a whole is very dependent on the wholesale price of eggs. Fortunately, specialty eggs are not subject to quite the same level of volatility and I think Cal-Maine's positioning in this space has been well timed and executed. Ultimately, though, it is not in control of the price. It is, however, perfectly set up to weather any price volatility as it has proven before. Both its short-term liquidity and long-term solvency situation allow it to continue operating at significantly lower prices than it is realizing today without breaking a sweat. With gross margins at nearly 32%, the company is a long way off from feeling any price pressure. Feed costs may also affect profitability.
Low-Risk Player In a Growth Market
To round off all of the above, given its financial strength, level of returns, experienced management, fabulous facilities and good strategy, I believe this a very low-risk play in a market that is set up for long-term, continued growth.
Given the growth prospects and cash flow generation of this business, our fair value comes out on a range of $75-$85, giving a 30% to 50% margin of safety. Given all the above factors, we're happy to peg this at the top of that range. This is a value investing and growth opportunity not to be missed.
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