Investors aiming to build wealth over the long term frequently use the principles of value investing, a strategy created by Benjamin Graham and famously used by Warren Buffett. Essentially, value investing means finding companies trading for less than their intrinsic value, the calculated worth of the business based on its assets, earnings, and future prospects. The aim is to buy these undervalued stocks with a sufficient "margin of safety," offering a buffer against mistakes in calculation or unexpected market events, and wait for the market to see their true worth. One way to find such opportunities is by looking for stocks that show good fundamental health and profitability but are priced low, indicating the market may not see their quality.
A recent search using this "decent value" method has identified Cal-Maine Foods Inc. (NASDAQ:CALM), the biggest producer and distributor of shell eggs in the United States. The company's integrated work, from feed production to egg packaging, and its varied products including conventional, cage-free, and organic eggs, establish it as a leader in a steady consumer staples area. For value investors, the attraction is not in uncertain growth stories but in sound financials available at a sensible price. A close look at Cal-Maine's fundamentals indicates it may match this description, pairing strong operational measures with a valuation that seems low.
Valuation: A Central Part of the Strategy
The valuation rating is the beginning for any value investment, as it directly measures the difference between market price and perceived intrinsic value. A high valuation score shows a stock is priced low compared to its financial performance and assets, which is the main situation value investors look for.
Cal-Maine's fundamental report gives it a Valuation Rating of 7 out of 10, showing it is priced well compared to similar companies and the wider market. Important measures backing this include:
- A trailing Price-to-Earnings (P/E) ratio of 3.68, which is much lower than the industry average of 20.88 and the S&P 500 average of 27.10. This makes CALM less expensive than about 98% of its industry.
- An Enterprise Value to EBITDA ratio and a Price-to-Free Cash Flow ratio that are also some of the best in the food products industry, showing the market is pricing the company's cash-generating ability cautiously.
While the forward P/E ratio is higher at 19.05, showing expected earnings normalization, it stays below the S&P 500 average. For a value investor, these standard valuation multiples indicate the stock is not weighed down by high market expectations, offering that important entry point at a price below clear business value.
Financial Health: The Base of Safety
A good financial health rating is essential for a careful value investment. It confirms the company has the steadiness to endure economic declines and the soundness to continue operating without high risk of financial trouble, important parts of the "margin of safety."
Cal-Maine does very well here, receiving a perfect Health Rating of 10. The company's balance sheet is very clean and strong:
- It has no debt, leading to a Debt-to-Equity ratio of 0. This removes interest expense risk and gives great financial adaptability.
- Liquidity is excellent, with a Current Ratio of 8.02 and a Quick Ratio of 6.46, much better than industry standards and showing a better ability to meet short-term needs.
- An Altman-Z score of 9.97 clearly shows a very low near-term risk of bankruptcy.
This flawless financial situation means Cal-Maine does not depend on helpful capital markets to continue, a key characteristic that lets value investors be calm while waiting for their valuation idea to develop.
Profitability: Quality at a Low Price
Value investing is not only about buying inexpensive stocks; it's about buying good companies at a low price. High profitability shows efficient management, competitive strengths, and the ability to create returns for shareholders, all signs of a business with lasting intrinsic value.
Cal-Maine's Profitability Rating of 9 shows first-class operational performance. The company's margins are very good for its industry:
- A Profit Margin of 27.37% and an Operating Margin of 34.15% put it in the top 2% of its peer group.
- Return measures are also very good, with a Return on Invested Capital (ROIC) of 37.57% and a Return on Equity (ROE) of 42.84%, both ranking at the highest of the industry.
These numbers show that Cal-Maine is not only a steady business but a very profitable one. For an investor, this mix of high profitability and a low valuation multiple is the perfect situation looked for by value methods, as it suggests the market is not fully valuing the company's earnings ability.
Growth and Future Points
While pure value investing often looks at current assets and earnings, knowing the growth path is useful to judge if a business is in a short-term slump or a long-term drop. The "decent value" search needs some growth to make sure the company is not a "value trap."
Cal-Maine's Growth Rating is a neutral 5, telling a story of two parts. The past year has been very good, with Earnings Per Share (EPS) growth of 93.70% and Revenue growth of 36.60%. However, the fundamental report mentions expectations for a decrease in both EPS and Revenue over the next few years. This expected normalization is common in the cyclical agricultural area and is probably a main reason for the stock's low valuation. For the value investor, the main question is whether this cyclical drop is already completely reflected in the price. The company's excellent health and profitability give a good base to handle a slower period, and its leading market position suggests it is well-situated for the long term.
Conclusion
Cal-Maine Foods offers an interesting example for a value-focused method. It shows the typical signs value investors look for: a low valuation based on standard measures, a very good and debt-free balance sheet, and industry-leading profitability. The expected earnings decrease brings an aspect of cyclical risk, but the company's financial strength provides a wide margin of safety to manage it.
The "decent value" method tries to find such hidden opportunities, companies where good fundamentals are temporarily hidden by near-term issues or area cycles, resulting in a good stock price. Investors can see the complete, detailed fundamental analysis for CALM here.
This review of Cal-Maine Foods was found using a particular fundamental screen. For investors wanting to find other companies that fit similar standards of good valuation, sound health, profitability, and growth, you can view the set "Decent Value Stocks" screen.
Disclaimer: This article is for information only and does not form financial advice, a suggestion to buy or sell any security, or a support of any investment method. The review is based on data and ratings from ChartMill, and investors should do their own research and think about their personal financial situation and risk tolerance before making any investment choices. Past performance does not show future results.
