CALM - Cal-Maine Foods: Peak Egg Prices

Summary

• Cal-Maine Foods, Inc. remains a solid trading stock.
• Inflation, strong demand, and a nasty avian flu have kept prices elevated, but we see egg prices normalizing through all of 2023.
• The nice Cal-Maine Foods, Inc. dividend is a windfall, but shares should fall with egg prices.
• Sell Cal-Maine Foods, Inc. stock.

Cal-Maine Foods, Inc. (CALM) remains a solid trading stock. Over the long term it has been a horrible investment, however. Right now, shares are a little off highs in this market, and the stock has enjoyed a huge bounce because egg prices are through the roof as demand has been strong while a vicious avian flu has wrecked supply.

A few months ago, when shares were in the high $50 range, we suggested selling the stock while you still could . Shares saw a few more points of upside that could have been squeezed out, but at the time of this writing shares are down about 3% from the call. Once the flu passes and hen stocks return to normal, we think shares fall further.

For now, the stock has generated some returns and there is a nice dividend being paid on the big windfall from higher egg prices. But folks, this surge was and is temporary. It may last a few more months, but the huge boost from rampant price inflation as well as favorable egg hatch data, and the avian flu will pass. We still rate Cal-Maine Foods, Inc. stock a sell here. But knowing our trading, we could just as easily turn around in 3-6 months and rate this a buy. We suspect that the stock will overshoot to the downside as the subsector stabilizes. In the mean time, we continue to watch not just pricing, but demand, volumes, and feed costs.

It is our belief that Cal-Maine Foods, Inc. stock is setting up for another run lower, and that the dividend, which is back, is likely to be reduced in coming quarters in later 2023. Right now performance is great, but we see this performance falling next year. Let us discuss.

Egg volumes

The company just reported fiscal Q2 2023 record earnings . The critical metrics that were aforementioned? Well, they led to a top and bottom line beat against consensus estimates . The top line was so strong, but is strongly associated with the price of eggs. The price drives a lot, but volume is a key driver of course. But with avian flu calming in 2023, and the hen supply and hatch rates likely stabilizing all of 2023, we see egg pricing trickle lower in coming months, along with the stock

So what drives volume? Demand. Egg demand has largely remained stable over the years, and is strong. For the commercial side, it is back to pre-pandemic levels in food service, and of course personal/ consumer trends remain positive.

As we progress in 2023, we suspect demand stays relatively strong. The price of eggs being so high has weighed somewhat on consumer demand, and on the commercial side, prices have increased so that gets passed on to the customer.

That said, net sales in the just reported fiscal Q2 doubled from a year ago. It was a new record for Q2, thanks to inflation in pricing and strong ongoing demand. Sales were $801.7 million, which were up 110% from last year. The increase in sales was a result of much better pricing, but there was actually a decrease in conventional egg volumes, while specialty egg volumes surged. In fact it was record demand for specialty eggs. The company sold 284.1 million dozen eggs this quarter, rising from 269.5 million dozen last year.

In the press release , CEO Sherman Miller stated:

We are proud to report another strong quarterly financial and operating performance for Cal-Maine Foods, with record sales and net income for the second quarter of fiscal 2023. These results reflect the current market environment characterized by record average selling prices for conventional eggs, primarily due to reduced supply related to the outbreak in the U.S. of highly pathogenic avian influenza (“HPAI”), and good customer demand. There have been no positive tests for HPAI at any of Cal-Maine Foods’ owned or contracted production facilities as of December 28, 2022. Consumer demand for shell eggs continued to be good in the quarter, especially leading up to the Thanksgiving holiday, and we experienced record quarterly volume levels for specialty eggs sold.

That is a key statement and suggests peak egg pricing is near. There were not avian flu positive tests. There was a big increase in pricing and favorable volume trends in specialty egg sales, along with efficient expense management, and this led to improved profitability with a gross profit margin of 39.0%. Another solid result which is underappreciated was that there was a noticeable increase in the amount of eggs sold relative to those produced, continuing strong trends on these differences. Specialty eggs are generally higher margin sales, depending on sale price and the costs to produce them, and there was record demand.

Sales of specialty eggs rose 35%. Further, a total of 33.8% of revenue was derived from specialty egg sales. This is a key driver for the company, as these are much higher margin than conventional eggs, generally speaking.

Egg prices have continued to move higher in fiscal 2023 due to the effects of a further reduction in supply related to the impact of the avian flu outbreak, combined with good customer demand which benefits from typical seasonal consumer demand in late fiscal Q2. Conventional egg prices came in at $2.883 per dozen, up from $0.1.73 per dozen last year. That is incredible. Prices of specialty egg rose from $1.898 per dozen, to $2.370. Specialty egg prices are usually much higher than traditional eggs given the amount it costs to produce such eggs. But with food price inflation and avian flu, egg supply was impacted, and led to this pricing mismatch. What is more, prices were up some from fiscal Q1, but we suspect as hen supply normalizes, we see egg prices fall in 2023.

Sell Cal-Maine Foods, Inc. stock. That said, if you are an investor, keep an eye on feed costs.

Feed costs

Feed costs have been on the rise. As specialty eggs are making up more and more volume, we need to be aware that the feed costs here are generally higher than for conventional eggs. Inflation costs can be seen here. Feed costs are up huge in the last two years. In fiscal Q2 2022 costs hit $0.529 per dozen, versus $0.390 in Q2 2021. Now in Q2 2023, costs were up another 30%.

Volumes drive revenues for sure, but with egg prices likely to be falling over the coming months due to hen supply expected to normalize, we have concerns. While inflation stabilizing generally should help the feed costs come down, as we move forward, operating income will suffer as the egg selling prices come down too and margins are crimped. As we said before a few weeks ago, and will say again, the "party is quickly coming to a close."

We recommend taking profit, again, if you have it as we see net income falling this time next year. For fiscal Q2, Cal-Maine Foods, Inc. saw an overall net income of $198.7 million, or $4.08 per share, in the quarter. This was way up from the $0.02 in EPS last year. Given the higher sales of specialty eggs and the fact that conventional eggs were so expensive, we expected a huge quarter. However, the feed and labor costs definitely weigh, and it could get ugly in a year from now when egg prices return to more normal levels.

Enjoy the dividend

We want to remind you that Cal-Maine Foods, Inc. pays a so-called variable dividend. We like this sustainable policy in our opinion as it is dependent on the income of the company. In a nutshell, shareholders get paid a dividend when the company is net profitable on a cumulative basis. The dividend paid to shareholders is equal to one-third of quarterly income, but it looks at income on a cumulative basis. So any losses need to be made up before a dividend is paid. Well, as prices rose the last few quarters, earnings have been positive. As such, with the strong earnings, a solid $1.35 dividend is getting paid. We suspect another quarter or two of solid EPS gain, but by next year, we think the Cal-Maine Foods, Inc. dividend will be all but gone as earnings erode.

Final thoughts

We have traded Cal-Maine Foods, Inc. stock so many times and would like to add that downside pressure is on here. Short sellers are making a bet that shares get creamed, with short interest north of 15%. We are betting also that Cal-Maine Foods, Inc. shares come down from $60.

Take your profit. While we usually take a long bias when Cal-Maine Foods stock is under $40, we are compelled to have a sell rating on Cal-Maine Foods, Inc. here as avian flu is resolved and egg prices likely to normalize over the next few quarters.

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