The Cal-Maine Thesis Is Playing Out
Cal-Maine (NASDAQ: CALM) is America’s largest producer of shell eggs and a growing concern. While the company’s revenue, earnings, and dividend can be volatile the reason is egg pricing and the cost of feed and not the company’s growth. The company has been expanding its operations steadily over the past few years and on track to maintain its number #1 ranking indefinitely, that’s not a concern. The thesis in Cal-Maine centers around its value and dividend.
The stock trades at a fairly high multiple because Cal-Maine is one of the best-managed available to public investment with ample cash and no debt but there is a catch. The dividend is dependent on a managed distribution plan that says the company can not make a payment to shareholders following a quarter of net loss. That's one reason they've been able to maintain such a strong balance sheet. Cal-Maine hasn’t made a distribution for many quarters because of it, and that has kept share prices down. Now, with the dividend firmly back in the picture this stock is on the move and we think headed higher.
Cal-Maine Reports Mixed Quarter
Cal-Maine reported a good if mixed 3rd quarter and one that suggests net-profitability will continue for the remainder of the year. The $359.0 million in net consolidated revenue is up 3.9% from last year but missed the consensus by 270 basis points. Revenue was driven by strong retail demand and offset by a sluggish improvement in both the Food Service and Hospitality markets. In terms of dozens, the company sold 3.14% more dozens than last year on a 3.1% decline in hen count that helped to boost margin. In terms of pricing, the company received $1.25 per dozen for the quarter or up $0.01 from last year which also helped boost margin.
Specialty egg sales were another major driver of revenue. Specialty eggs include anything and everything from free-range to hormone-free, cage-free, all-natural, etc, and are key to the company’s growth strategy. Not only do specialty eggs command a higher price but the specialty egg market is supported by regulatory trends across America. Sales of specialty eggs increased in volume by 16.2% to account for 41.4% of revenue. This is up from 37.2% of revenue in the YOY period and expected to continue growing.
Looking forward, the company is entering the highest sales period of the year and one that should see a significant boost from the reopening. Sales of eggs and pricing should continue to accelerate but there are factors that may keep pricing from moving up too much more. According to the USDA, the number of hens in the national flock and eggs produced in the quarter are down from last year but hatchings and eggs in incubators point to rising hen count and egg production.
Cal-Maine Reinstates The Dividend And Shares Are Moving Higher
Cal-Maine missed consensus on the top line but internal efficiencies and rising sales produced a solid beat on the bottom line. The $0.28 in adjusted earnings is flat from last year but shows a surprising amount of leverage compared to the consensus $0.07 in light of the revenue miss. The good news, the best news, is that the $0.28 in earnings is more than enough to put the company back into a dividend-paying position and it has already paid off. The company announced a payment of $0.034 per share or 0.34%, not much we know, but this is just the first. Assuming the company can squeeze out $0.28 next quarter the payment could grow by more than 100%.
Shares of Cal-Maine began moving at the start of the year because egg-market conditions were favorable. Now, with EPS outpacing consensus and a favorable if not a strong outlook for 2021, shares are moving higher again. The Q3 report has price action up more than 2.0% in premarket trading and confirming support at the EMA. Price will probably move up to retest the recent high at least and may move higher if market conditions remain favorable. A break above $43 could get the market back up to $46, a strong reopening and positive data out of the restaurant industry would help drive Cal-Maine back to $52 and possibly higher.
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