CALM - Cal-Maine Foods: A Significant Miss Drives Shares Lower But Some Positives Persist

2024-01-03 17:57:45 ET

Summary

• Cal-Maine Foods, Inc.'s fiscal Q2 2024 egg volumes missed expectations, with a significant drop in sales and poor earnings.
• A massive decrease in sales explained.
• Feed costs have declined, which is a positive factor for margins, but the variable dividend may not meet income expectations.
• Near-term likely lower for Cal-Maine Foods, but positives are there.

After a massive surge in egg pricing in 2022, Cal-Maine Foods, Inc. ( CALM ) stock enjoyed an incredible bounce. We cautioned investors to sell the stock in December 2022. While shares trickled a bit higher from that call, shares began to reset shortly into 2023. Shares have crept up in the last few weeks, but we believe this move is once again overdone.

Having traded this stock a number of times, we can tell you it is subject to swings. We suspect the next swing is mildly lower from here. Longer term, the company is investing heavily in its infrastructure and farms. Egg volume remains strong, and demand is there from both consumers and businesses, though egg pricing and feed costs suggest the stock may be ahead of itself. Still, the company has a solid balance sheet and a strong management record, but it is still a much better trading stock as opposed to buy and hold, in our opinion.

We remain neutral overall but suspect the nearer-term direction is lower. There is a variable dividend here which is an added bonus in strong times but is less than ideal for income. The just-reported fiscal Q2 earnings show strong volumes, but mixed pricing results and feed cost data. Let us discuss.

Cal-Maine Foods' fiscal Q2 e gg volumes

The company missed pretty handily on both the top and bottom lines relative to consensus estimates . The top line saw a dramatic drop-off and earnings were quite poor. Volumes are only part of the equation, but egg pricing is the main driver of margins, along with expenses, such as feed costs. Egg demand has largely remained stable and is currently considered to be at a moderate level by the USDA. Restaurant/commercial demand remains strong, as restaurants are still enjoying a steady flow of customers. We have seen a normalization in pricing which drove revenues lower, though volumes were strong.

Net sales in the just-reported fiscal Q2 fell 35% from a year ago. Sales were $523 million, down from a strong $800.1 million last year. The decrease in sales was a result of the decline in pricing, but there was actually an increase in conventional egg volumes, while specialty egg volumes declined. The company sold 288.2 million dozen eggs this quarter, rising 1.3% from a year ago, and up by 11 million dozen from the sequential quarter. CEO Sherman Miller stated in the earnings release:

...we benefitted from lower feed ingredient prices compared with the same period a year ago. We continued to focus on the aspects of our business we can control and managed our operations efficiently despite higher input costs at our production, processing and distribution centers, as well as ongoing investments in enhanced biosecurity measures to mitigate the risk of highly pathogenic avian influenza...Current indications for corn project an overall better stocks-to-use ratio implying potentially lower prices in the near term; however, as we continue to face uncertain external forces including weather patterns and global supply chain disruptions, volatility could remain. Soybean meal supply has remained tight relative to demand in the second quarter of fiscal 2024."

The avian flu outbreaks are a double-edged sword. On the one hand, it can decrease hen supply and egg availability, benefitting prices, but on the other, it leads to increased costs for prevention. So, as we look ahead, we expect increased operating costs, and slightly better egg prices sequentially, but not a dramatic increase like we saw a year ago. While there were some favorable impacts on the expense side of the equation, egg pricing crushed margins. Gross margin fell to just 17.9% from 39.7% a year ago. However, it was a sequential improvement from 9.9%. In our opinion, the recent move higher in the stock accounts for all of this and then some.

Sales of specialty eggs fell 0.8% from a year ago. Specialty pricing was down to $2.27 per dozen from $2.37 per dozen. Conventional volumes were up about 4% - but the pricing really weighed. Conventional egg prices came in at $1.46 per dozen, down markedly from $2.37 per dozen last year, but those prices were up nicely from $1.24 per dozen in fiscal Q1.

Long term, we do like that management has invested significant capital to acquire and construct cage-free facilities. The cage-free egg volume has continued to increase. Cage-free eggs accounted for approximately 30% of egg revenue.

Feed costs for Cal-Maine Foods in fiscal Q2

Feed costs have trended higher over the years. Feed costs are also generally higher for specialty and cage-free eggs, which make up more of the sales volume as we have moved forward since our coverage began. That said, feed costs impact margins heavily. But the inflation in feed costs has normalized. In fact, feed costs continue to decline, perhaps the most bullish point of this report. Feed costs fell from $0.685 per dozen to $0.554 per dozen. This was also down sequentially from $0.597 per dozen.

So, with better selling prices and lower feed costs, we are confident in saying fiscal Q2 was much improved from fiscal Q1. The company swung from an operating loss of $6.8 million in fiscal Q1 to $14.2 million. While that is a positive, it is a far cry from the $259.9 million a year ago. For fiscal Q2, Cal-Maine Foods, Inc. saw an overall net income of $16.6 million, or $0.35 per share, missing estimates by a whopping $0.48. For now, the contribution to the dividend is positive, but net income was far less than expected, meaning the dividend is likely lower than most shareholders may have anticipated.

A word on Cal-Maine Foods' variable dividend

Recall that Cal-Maine Foods, Inc. pays a "variable" dividend . We are a fan of this policy overall from a cash management perspective, but that makes it tough if you are seeking income. Shareholders will get paid a dividend when the company is net profitable on a cumulative basis. Any losses need to be made up before a dividend can be paid. The policy management has set forth is that the dividend paid to shareholders is equal to one-third of quarterly income. Since there was positive net income, and no losses to be covered, there was a $0.116 per share dividend declared.

Final thoughts

It really is all about egg pricing for Cal-Maine Foods, Inc., though over the years volume continues to tick up on more and more demand. This is a major player in the space, but eggs are a commodity and subject to pricing swings. When pricing is increasing, shares appreciate, and income tends to rise. But we view Cal-Maine Foods, Inc. as a trading stock. Right now, we maintain a neutral bias, though suspect the next near-term move is lower. We would still look for long entry in the $40's assuming pricing held around current levels. The main positive in the quarter, we believe, is the ongoing deflation in feed costs. It is a major factor for Cal-Maine Foods, Inc.'s margins.

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