CALM - Cal-Maine Foods: Protect Your Portfolio With Eggs

2023-05-03 05:22:12 ET

Summary

• A defensive food producer, with a low valuation and sound balance sheet (flush with cash) is egg-focused Cal-Maine.
• 14-year low price to tangible book value now available.
• Using basic enterprise value ratio analysis, and assuming a return to 10-year average valuations, CALM could be selling for a 30% to 40% discount at a price of $46.
• An extremely high short interest position could cover at any time and boost price with little warning.

When the equity market tanks, the usual advice is "don't panic, stay calm" in your decision making. Well, CALM is also the symbol for a sound defensive buy in the world of food production. Cal-Maine ( CALM ) is one of the top U.S. packagers, marketers and distributors of fresh shelled eggs, with a 20% retail share nationally. Without eggs as an ingredient, breakfast and baked goods would not be the same. Whether sold directly to other food companies or purchased at your local grocer under the Egg-Land's Best , Land O' Lakes , Farmhouse Eggs , 4-Grain , and a variety of private label brands, most consumers in America have purchased eggs from the company.

With a version of the bird flu killing off tens of millions of egg-laying chickens, we have all felt the spike in egg prices during 2022-23 through our pocketbooks (reaching over $5 per grade A dozen at the peak). The good news is Cal-Maine earned record profits over this span, paid out monster dividends, while also keeping tons of cash to improve its business during coming years.

What's interesting at this point in time is investors have given up on the boom in egg pricing as an investment, and an oversized short interest position has driven the price lower in 2023, from the low-$60s in December to $46 currently. Amazingly as of today (May 2nd), CALM has closed lower for 10 straight sessions. However, the long-term business setup is much more valuable than a year ago, despite the share quote roughly sitting in the same position as late May 2022 or even May 2018!

After all the wild price moves for eggs, record income for the company has been achieved and a round of special dividends have been paid. Yet, the valuation story for new share buyers is not stretched or excessive. I believe Cal-Maine is worthy of closer investigation.

Low Valuation Remains

For sure, the spike in egg prices has been a welcome gift to the company and its shareholders. Cash EPS estimates for fiscal 2023 (ending in May) are a whopping $16. That's generating a current P/E around 3x, far away from the equivalent period S&P 500 ratio closer to 20x. Of course, Wall Street is projecting a return to normal in business trends later in 2023-24 (assuming the bird flu supply problem fades), with net operating profitability falling all the way to $4.41 per share over the next full year starting in June.

Still, on a forward 1-year review, the present $46 stock quote works out to a P/E around 10x. (The below graph includes this May's strong expected quarter plus the first 3 quarters of next fiscal year.) In addition, the price to sales ratio near 1x on a forward basis is not overvalued vs. the food industry.

When we compare both stats to other food producers and processors of all types, Cal-Maine may actually stand as a bargain vs. peers, at least on earnings. The median average of my food supplier sort group is closer to 15x.

When we review price to forward projected sales for the group, 1x future revenue is squarely in the middle of other valuations.

For me, the financial valuation stat that jumps out is the current stock price comparted to underlying tangible book value (including net cash, inventory, receivables and plant & equipment). Believe it or not, CALM just reached its lowest price to tangible book value since 2009, standing at a multiple of 1.5x today.

Enterprise Value Stats

The main reason for a flat share price converging with its net hard asset value is the cash windfall created from 2022-23's egg shortage. Even after paying out $5.28 in dividends per share the last 5 quarters, management has built cash holdings by greater than $500 million since early 2022 to $645 million at the end of February (which may grow again when the May period is finished and announced).

More positive news, Cal-Maine has historically used little debt ($107 million at the end of February) to continue operations and expand the business. So, the company is holding a large excess of cash it doesn't really need to maintain sales and income. This sum could (and will) be paid out as future dividends, or used in a large share buyback, or reinvested into acquisitions.

When we subtract out the net cash from today's market capitalization, enterprise value for the whole business is bouncing off 10-year lows at $1.6 billion.

When we take this enterprise value number and factor it against cash EBITDA (earnings before interest, taxes, depreciation and amortization) or revenues, Cal-Maine gets even cheaper for new investors. Using immediate past and future figures, EV to EBITDA of 1.5x and EV to sales of 0.5x to 0.75x are quite inexpensive.

10-year EV averages are 10x on EBITDA and almost 1.2x on revenue. Even when we take into account 2024 estimates by Wall Street for earnings and sales, you can argue CALM is selling for a 30% to 40% discount to long-term averages using past EV readings!

Short Interest Position

Why is Cal-Maine so cheap? The biggest excuse is shares have been sold down the river by aggressive shorts. Since egg-laying birds can reproduce quickly, the sudden rise in egg prices will likely fall just as hard into 2024. Short sellers have been quick to front run this expected decline. And, in March-April they engineered a fairly steep -30% share price plunge.

The short position in April stood at a 6-year high around 7 million shares, which represented 14% of outstanding issued ownership units, borrowed from other accounts and sold into the marketplace.

How does this short position stack up against the peer food group? It's actually a huge outlier, truth be told. The short position is 3x higher than any of the other names, and 7x the median average.

The bullish view is this previously short sold position could easily turn on a dime to short covering given renewed egg/food inflation (from a stubborn to leave avian flu situation or another round of money printing by the Fed, as examples). If shorts flip to buying, instead of selling, a major supply overhang will not only be removed, but the reverse situation could push a short squeeze into the share price. In other words, a complete imbalance of aggressive buying interest vs. limited daily share supply could vault price back to $60 with little advance warning.

Final Thoughts

While the technical momentum chart is quite ugly as of this writing, the 14-day Money Flow Index reached an incredibly stretched score of 15, which is its lowest since December 2018. After that truly oversold reading, this conservatively-run business experienced a +15% total return rise over the next 3 months into March 2019.

Cal-Maine is a terrific food-inflation hedge in my mind, with an oversold setup begging for a strong bounce. It's backed by a stronger valuation than most food names, with a short interest position primed for material covering on any good news from management or egg price reversal higher again.

What could go wrong? The primary risk is egg prices collapse and stay low during a deep recession. However, just like grain/agriculture commodities, egg prices tend to hold up better than industrial commodities in a recessionary environment. When we review GDP contraction performance, eggs have even been able to rise in price during more than a few events since 1950.

Assuming a bearish slide in egg prices the rest of the year, Cal-Maine's low valuation and super-sized short position may still be able to support the share quote from here. Absent an overall Wall Street crash in equity prices, I do not believe CALM prices under $40 are realistic for a prolonged period.

So, if upside is back to $60 and downside is around $40 over the next 12 months, today's $46 price should be viewed as a solid accumulation proposition. I rate Cal-Maine a Buy , and believe it deserves a spot in your portfolio alongside other farm economy favorites, with strong balance sheets, reasonable valuations, and steady dividend payouts. My current buy list includes Tyson Foods ( TSN ), Archer-Daniels-Midland ( ADM ), and Nutrien ( NTR ), as smart buy-on-weakness ideas to start.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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