We Wrote Off Cal-Maine Foods Too Soon
Cal-Maine Foods (NASDAQ:CALM) struggled with profitability last year leading us to write the stock off at the end of 2021. That was a mistake because right about the time we were cutting the stock loose from our coverage sphere, the egg-market fundamentals took a surprising turn for the better.
Flock sizes and egg production combined with demand trends to drive egg prices higher and now we’ve got a company that is not only producing positive cash flow, but enough to offset prior losses and allow the board to declare a dividend.
We can’t be sure the dividend will stick around for long due to the strict payment policy, but it does look like the company will be paying it for the next few quarters at least.
Cal-Maine Moves Up On Fundamental Shift
Cal-Maine had a great quarter supported by both volume and pricing. Volume improved by 2.8% while pricing added another 29.4% to drive a 33% increase in YOY revenue. This is 185 basis points better than the Marketbeat.com consensus and is only one reason why shares are moving higher. The strength was driven by an increase in specialty eggs as well as a return to more normalized business on the food service end of the operation.
Moving down to the income, the company reported a 600 basis point improvement in gross margin driven by the strong pricing environment. This led to GAAP earnings of $0.81 per share or more than double what the company made last year.
The EPS missed the consensus by $0.02, but the miss is easy to overlook in light of the dividend. Cal-Maine hasn’t paid any dividends since May 2021 and the last before that was May of 2019 so there are some investors who’ve been waiting quite a long time. The new payout is $0.125 per share which is good for a yield of 0.90% and the stock goes ex-dividend on April 26th.
Cal-Maine did not give any formal guidance, but the industry update is favorable for both pricing and demand. The USDA says flock sizes are down 1.6% from last year, not including any new impacts from the HPAI avian flu. The flock size is below the 5-year average as well and the hatch numbers don’t point to a bigger flock.
The hatch was down -5.5% with pullets down by -7% and likely to move lower before the end of the HPAI outbreak. The outbreak is, at this time, still small and well contained and not a threat to Cal-Maine. Meanwhile, Cal-Maine is allocating more than $80 million to expand its specialty egg production, a key driver of its organic growth.
An Analyst Is Excited About Cal-Maine
At least one analyst at Consumer Edge is excited about Cal-Maine’s Q3 report. They upped their rating on the stock to Overweight from Equal Weight with a price target of $60. That’s about 10% above the recent price action and maybe a conservative target if market fundamentals skew more into Cal-Maine’s favor.
As for the rest of the community, there are only 2 total ratings less than 1-year old and the other is about 1-year old so doesn’t carry much weight.
The Technical Outlook: Cal-Maine Flies To New Heights
Shares of Cal-Maine popped more than 5% in the wake of the Q3 results and may move higher. The post-release action confirmed the strengthening uptrend and puts a price target of $62.50 into play.
The indicators are also bullish and support the move but there is a caveat. If the market doesn’t follow through on the signal, this rally could already be dead in the water. There is some resistance at the $56 level that could keep the stock from moving much higher.
