I recently cracked open some eggs and made a blueberry omelet. It was delicious, quick to prepare and, no doubt, quite nutritious. What’s not to like (assuming you’re not vegan)?

“The rising cost of eggs”, you may be thinking. Indeed, the retail price of a dozen eggs increased by an average of 11.2% across the country between March 2021 and March 2022, according to the government’s most recent Consumer Price Index release. , and it seems likely that the April release will show a a lot larger annual increase. Overall, food prices rose 8.8% over this period.

Eggs have been subject to the same inflationary pressures affecting most groceries, namely global supply chain issues related to the pandemic. Their price has also recently increased for another reason: the worst U.S. outbreak of highly pathogenic avian influenza — aka “bird flu” — since 2015. The current outbreak, which was first detected in February at a farm in the ‘Indiana, quickly spread to chicken and turkey flocks across the country. And when the disease is detected in the herd of a farm, that whole herd is slaughtered. As of April 6, this avian flu outbreak and the measures taken to contain it had reduced the country’s table-layer flock by about 5%, according to the mid-April update from the US Department of Agriculture. This percentage is about to increase, perhaps sharply.

Eggs are a staple, so most people don’t cut them — at least not much — when prices go up. As for the demand, it is on the rise. Americans ate an average of 286.5 eggs each in 2020, up 18% in a decade, according to Statista.

This supply-demand scenario is not positive for consumers. But it can turn into something much more pleasing to the palate if you swap out your toque (or chef’s hat) for your investor’s hat. As of Thursday’s close, shares of Cal Maine Foods (CALM -0.49%), the largest producer and marketer of fresh shell eggs in the United States, has posted a year-to-date return of 49.6%. the S&P500 and Nasdaq the indices (including dividends) are down 9.7% and 17.6%, respectively, over this period.

Cal-Maine shares have the potential to continue to be winners over the long term, but they are only suitable for investors who are comfortable with volatility. Let’s do with this broth what I recently did with this blueberry omelet: enjoy.

The Cal-Maine business and its catalysts for growth

Cal-Maine Foods produces and sells conventional and specialty fresh shell eggs under well-known brand names such as Egg-Land’s Best and Land O’ Lakes, as well as private labels. Its specialty products include cage-raised and organic eggs, among others. Its customers are food service retailers and distributors in the Southwest, Southeast, Midwest and Mid-Atlantic regions of the United States.

The Mississippi-based company was founded in the 1950s and went public in 1996. It has grown both organically and through acquisitions. From 1989 to its 2021 fiscal year (which ended in May 2021), it made 22 acquisitions. At its November 2020 investor pitch, it controlled a 19% share of the U.S. shell egg market.

Cal-Maine has several potential growth catalysts. First, it could continue to grow through acquisitions. The American shell egg industry remains quite fragmented, as there are many small egg farms across the country. Cal-Maine’s status as an industry leader places it in the best position to pick up desirable operations. And the bigger it gets, the more it should benefit from economies of scale.

Additionally, the company’s financial resources have put it in the catbird seat when it comes to expanding its cage-free egg production. Not only has consumer demand for cage-free eggs and other specialty eggs increased, but U.S. states have increasingly passed laws requiring all eggs sold within their borders to be laid by live hens. in cage-free conditions or better on a certain date. (“Best” in this case refers to free range, pasture conditions.) In addition, many large corporate egg buyers – such as walmart and McDonald’s — have set target dates for their transition to 100% cage-free supply chains.

Finally, the current avian flu outbreak has the potential to be positive for Cal-Maine in other ways besides driving up egg prices. This could encourage some owners of small egg production operations to sell their business. It is costly to implement the necessary measures to help prevent these outbreaks and control their damage. Small operators may not have the financial resources to easily absorb these costs.

The frequency and geographic spread of avian flu epidemics increased following the emergence of a specific viral lineage in 1996, according to a recent literature review article in The Journal of Wildlife Management. There is no good reason to believe that this trend will not continue. More frequent and severe outbreaks of avian flu would likely accelerate the consolidation of the egg farming industry.

Data by YCharts.

Finance and stock market statistics

In Cal-Maine’s fiscal 2022 third quarter, which ended Feb. 26, its revenue jumped 33% year-over-year to $477.5 million. Specialty eggs – which are more profitable for the company than conventional eggs – accounted for 39% of total turnover. Revenue growth was driven by a 29% increase in the average selling price the company received for its eggs, as well as a 3% increase in sales volume. Net income was $39.5 million, or $0.81 per share, up 189% from $0.28 per share a year ago.

Data sources: Yahoo! Finance and YCharts. P/E = price to earnings. TTM = last 12 months. EPS = earnings per share. Data as of April 27, 2022.

Cal-Maine pays a quarterly dividend equal to one-third of its prior quarter GAAP net income. Thus, after a quarter in which it reports no net income attributable to its business, it will not pay a dividend until it is “profitable on a cumulative basis calculated from the date of the last quarter for which a dividend has been paid”.

Cal-Maine stock has an attractive valuation from a P/E perspective for a stock that Wall Street expects earnings per share to grow at an average annualized rate of 245% over the next five years . This is a territory of deep value.

The stock price is cheap, largely because shell egg prices tend to be volatile, making it a riskier investment than average, at least in the short to medium term. Also, the market hates uncertainty, and this bird flu outbreak is creating a lot of that. Although Cal-Maine has yet to report an outbreak on any of its farms, it’s certainly possible that some — even a large portion — of its laying flock could be affected.

Cal-Maine stock may not be suitable for every investor’s portfolio, but for risk-tolerant investors with truly long-term investment horizons, it’s worth considering.