For God has not given us a spirit of fear, but of power and of love and of a sound mind.
2 Timothy 1:7
As a Christian, I am meant to not live my life with fear. Having a relationship with God through Jesus Christ is meant to be my source of power and love to give me peace and discernment in all that I do. Fear is still a reality as throughout life, things come up that generate this emotion. But it isn’t so much of becoming immune to fear, but instead, how I choose to react to it. Over time, my relationship with God should lead me to being capable of absorbing the challenges that fears create and trusting in God’s truths to help guide me through them confidently.
What a great topic for investing. The adage of being fearful when others are greedy and vice versa is ingrained into many retail investors’ minds. However, fear is a very real barrier both to restrict the execution of buying or selling stock positions. Sound mind or discernment is the critical element to making the right decision at the right time. Having visibility and information to make these decisions is also important, but making the right call is often driven by wisdom and experience. Having foresight and being prepared for actionable moves are all extensions of developed management strategies over time and the expertise at implementing them.
The topic of this blog is simple, should an investor consider initiating or accumulating shares in Vital Farms, Inc. (VITL) or Cal-Maine Foods, Inc. (CALM)? For those looking for an immediate answer, mine is to go with VITL.
The current shell egg market is not in a stable state, making it a little difficult to compare these companies. This is due to persistent avian influenza, or bird flu, that initially began in 2022. Shell egg prices have been volatile and higher over the course of the past few years, and this has been exacerbated further of late. The macro-economic environment is also in a soft state that has been the case over the past few years as well due to consumers being stretched very thin from inflationary impacts.
With this in mind, there are a few key distinctions that should be made across these companies in order to help retail investors think about making their own decisions.
Differing Shell Egg Industry Pricing Strategies
VITL and CALM have separate approaches to how they are exposed to shell egg pricing fluctuations. On the one hand, VITL generates a stable premium on their shell egg products including primarily cage free and organic options for consumers. CALM prices its shell egg products in a pegged fashion due to its heavier dependence on conventional products being 65 percent of the total. CALM’s specialty shell egg products are growing the fastest, but the pricing discrepancy is clear as the company’s conventional products per dozen have risen to a net average selling price higher than that of its specialty products for the first time. VITL’s approach to stable shell egg prices is illustrated by CALM's specialty pricing above and gives consumers an expected experience to mitigate some of the cyclical volatility.
Differing Sales Growth Strategies
In line with these pricing differences, VITL focuses on growing its number of small farms robustly, with the current number totaling 425 farmers at the end of 2024. CALM relies on larger shell egg production facilities substantially increasing the number of hens per facility versus VITL’s more disparate approach. This has solidified one of VITL’s key goals for this strategy, having a substantially reduced impact from the bird flu versus CALM seeing impacts in Texas.
The other consideration for retail investors is that CALM’s revenue performance is strongly impacted by pricing volatility versus VITL. Average analysts are expecting CALM’s upcoming next fiscal year revenue in 2026 to drop by nearly 30 percent, an outcome from expected shell egg prices dropping once the bird flu subsides. VITL is expected to see sustained revenue growth over the next two years near 20 percent per year as the company continues to grow its farmer network and centralized distribution of its products. VITL will be on track to grow into a penetration of the combined companies' revenue north of 25 percent by this time.
Differing Margin Performance & Valuation Multiples
Just like the impact of shell egg pricing volatility on revenue, margin expansion and contraction are also affected. For CALM, the company’s current margins are at all-time highs with the OCF margin standing at 20 percent, the second highest level in the company’s public history. VITL’s OCF margin sits at 11 percent.
The separation in OCF margin has led to substantial different cash flow valuation multiples. CALM trades at 6.5 times cash flow while VITL trades around 20 times. For CALM visibility is challenging as the expected decline in shell egg prices will have a corresponding impact on contracting margins for the company, whereas VITL’s margins should see more stability and/or modest fluctuations based on their growth.
Final Thoughts
The important takeaway for retail investors is that CALM is likely to see declining revenue from shell egg price declines while VITL will continue to see increases stemming from new farm growth and sustained pricing. At the same time, we should expect to see margins contract for CALM that will expand their multiple from the current low level, while VITL will be able to sustain its performance and/or improve upon it marginally.
CALM does pay a dividend that currently sits at a 3.5 percent yield as an added benefit for retail investors. But during tough down cycles, this dividend is at risk of loss. There is no denying that VITL is gaining strong market share as it continues on its path of generating $1 billion in revenue. The company has focused on a business approach that resonates with consumers. CALM is still in a legacy position where it is cannibalizing its conventional business as specialty continues to grow faster.
VITL is in a more mundane industry that some retail investors, notably aggressive growth-oriented ones may think to overlook. But the company is akin to an innovator that has found a market to penetrate with a product that is important through a different business approach. VITL is an innovator and companies like CALM and the many other shell egg producers will find difficulty in transitioning quickly to this model that has gained consumer engagement, interest, and value.
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