Cal-Maine Sees Sunny Side of High Egg Prices

Lately that doesn't seem to matter. Last year egg prices soared 29%. This year they're climbing faster. During the first quarter, the average price for a dozen regular eggs increased 55 cents to $2.16 a dozen, while cage-free eggs increased 23 cents to $3.00. (Note the narrowing spread between the two.)

We can trace part of the blame to rising corn prices, and thus, to dear oil, since it takes heaps of crude to grow corn, and since much of America's corn crop is now being converted to fuel. Corn, indeed, is the biggest part of chicken feed, which accounts for more than half of egg producers' costs. But if commodities were solely to blame, egg producers would be collecting more revenue, but spending more to generate it, meaning their profits would be little to cluck about.

That's not nearly what's happening. Consider the nation's largest egg-seller, Jackson, Miss.-based Cal-Maine Foods (CALM), with nearly 16% of the market. Five years ago its stock went for $2. Today it's $34. Also five years ago, operating profit totaled just seven cents on the dollar. Now it's 23 cents. Eggs are suddenly more profitable than Apple (AAPL).

Credit People for the Ethical Treatment of Animals, known as PETA for short. Like the American Civil Liberties Union, PETA is sometimes crazy, but mostly beneficial. That is, the ACLU makes headlines when it, say, demands free speech for members of NAMBLA, the North American Man/Boy Love Association. (Don't ask.) But mostly it demands free speech for everyone. PETA angers sensible people when it uses phrases like "Holocaust on Your Plate" to describe factory farming. But most of its tactics are tamer, and it gets results. Chickens today have a bit more flapping-around room — 67 square inches per cage, up from 50 square inches in 2002 — because of guidelines voluntarily adopted by United Egg Producers, a trade group.

Of course, that means fewer chickens, which in turn means fewer eggs. And so the industry is defying classroom economics by decreasing production amid higher prices — just the opposite of what has sabotaged past price surges. Maybe United Egg Producers is appeasing PETA. (From what I know about the group, it would surely prefer you pass on eggs altogether.) Or maybe it has just found a way to get farmers to legally cooperate in favor of plumper profits.

If the latter is the case, it suggests high egg prices might outlive the surge in corn costs. Chickens will be a little better for it. The poor will be a little worse. Holders of Cal-Maine Foods shares might fare best. The company, which has little analyst coverage, turned up recently on a search for low price/sales ratios. The stock's P/S of 0.9 suggests a discount of a third to the broad market, despite a more than doubling in the company's profit last quarter.

I'd love to take to my high horse now in defense of chickens and against Cal-Maine stock, if only because I'm pretty sure that sort of social crusading impresses women here in New York. But I'm paid to find stocks that are headed higher, and this one seems like one of them. Flush with cash, Cal-Maine says it will start paying a variable dividend equal to a third of its profits. That strikes me as ethical treatment of stakeholders.

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