NEW YORK (TheStreet) -- Whether scrambled, boiled, poached, deviled or as an omelet, eggs have been a breakfast staple for .... let's just say, a long time. And good luck baking a decent cake without them.
Coupled with better pricing and lower feed costs, its shares, which are down 10.5% in the past six months, should rebound as Cal-Maine's profits improve. So ahead of the company's fiscal 2015 third-quarter earnings results Monday, Cal-Maine is a name to keep an eye on in the packaged food sector as a potential turnaround candidate.
Given that Cal-Maine shares are still 35% higher than they were a year ago, describing it as a "turnaround candidate" may seem a bit off. But at around $38 per share, not only has Cal-Maine lost more than 10% of its value in the past six months, its shares have posted a 21% decline since hitting their 52-week high of $48.31 last October. And its tough to ignore how undervalued Cal-Maine shares have become.
With a P/E ratio of 13 times trailing earnings, the Cal-Maine stock is trading at a major discount to the S&P 500 (SPX) , which has an average P/E ratio of 21, according toCNN Money. And this is even though Cal-Maine, with an operating margin of 13% and a gross margin of 24%, exceeds its peer group in both categories, according toYahoo! Finance. This means the Jackson, Miss.-based company is doing the right things to boost its profits.
Accordingly, analysts are positive about Cal-Maine's long-term prospects. Its average 12-month price target of $44.25 is 16% above current levels. Should it hit it's high target of $51, it would deliver gains of more than 34%. Conversely, in terms of risk, its lowest target is $37.50, a mere 1.3% below current levels.
Moreover, analysts polled by Yahoo! Financehave raised earnings estimates for the quarter ending in May by more than 4% in the past three months, from 70 cents per share to 73 cents per share. Beyond that, full-year 2015 earnings projections been raised 1.3% to $3.10 per share, and estimates for 2016 are now almost 3% higher at $2.89 per share.
Why the confidence? Obviously, America loves eggs. But not only has Cal-Maine shown it can make money from the eggs it sells, the company is having a hard time keeping up with demand. And that's a problem businesses love to have.
In the second quarter, for instance, revenue climbed 7% to $378.6 million. But here's the thing: Production volume was up only 4.2% from the year before. This means Cal-Maine is growing revenue at a faster rate than production. And even with the company's prices up 2.9%, Cal-Maine still managed to sell more than 260 million dozen eggs, up more than 4% from the previous year.
Its specialty eggs, sold under brands including Egglands Best and Land O Lakes, account for 27% of total revenue, and are driving Cal-Maine's sales higher. And with analysts raising their estimates -- an implicit statement that they believe that these trends will continue -- Cal-Maine appears to be a good stock to hold for the long term.
This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.