CALM - Cal-Maine Foods: Record Margins And Dividend As Avian Influenza Rages

Summary

• Cal-Maine Foods is riding the tailwinds of the February outbreak of HPAI as a historical supply deficit pushes egg prices to new highs.
• The company declared its highest-ever quarterly dividend as margins surged.
• CALM's common shares dropped by 5% in after-hours trading as investors fretted over a miss on consensus estimates.

The highly pathogenic avian influenza outbreak this year has decimated US bird stocks, killing at least 58 million birds and driving a record rise in egg prices. This has led to an incredible windfall for the largest producer and distributor of shell eggs in the US, Cal-Maine Foods ( CALM ). The company just reported earnings for its fiscal 2023 second quarter ending November 26, 2022, which saw record gross margins, net income, and its highest-ever variable quarterly cash dividend payout.

The Ridgeland, Mississippi-based company declared a per share cash dividend of $1.35 , roughly one-third of its net income per share during the quarter as it continued to benefit from the nearly year-long egg environment characterized by fast-rising prices. This in many ways reflects the current situation being faced by the oil majors as a supply-side shock sparks a record egg supply deficit against robust demand to drive prices to record highs.

This has caused common shares of Cal-Maine Foods to increase by 73.6% year-to-date on a total return basis this year, boosted by the February start of HPAI in the US and the subsequent explosion in the average selling price of both conventional and speciality eggs. Cumulative dividends for the last four quarters now stand at $3.08, an annualized yield of just under 5% on the commons.

An Egg Driven Windfall

Retail egg prices have risen significantly this year, up over 30% from January and outpacing broader CPI. Cal-Maine Foods saw prices for its conventional eggs fetch a net average selling price per dozen of $2.883, up by 150% from $1.151 in the year-ago quarter. Speciality eggs, which include organic, also surged, reaching a net average selling price per dozen of $2.370, up 25% from $1.898 in the year-ago comp. This was an exceptional quarter in the sense that conventional eggs fetched higher selling prices than speciality eggs, an inversion of the mean.

Total revenue during the second quarter came in at $801.7 million , an increase of 110% from $381.7 million in the year-ago quarter with total dozens sold reaching 284.1 million during the quarter, an increase of 5.4% from the year-ago comp of 269.6 million. The surge in average selling prices of course drove the majority of revenue growth with both conventional and speciality eggs reaching record revenue. Conventional eggs did suffer a 2.2% drop in volume which helped boost speciality eggs to its largest per cent of total revenue for a quarter at 29.4%.

The company has so far not detected a positive test for influenza at any of its facilities, bringing both opportunity and risk. The situation has radically culled supply for a food product with a somewhat inelastic demand profile.

This has meant gross profit margin of 39.6%, up around 656 basis points sequentially from 33.04% in the prior first quarter. Such a record margin has raised the question of just how long the current tailwind will last as volume demand will likely remain relatively stable even against exploding prices. Eggs are a staple food item and a near-necessity for millions of households in the US. They form the base for baking and are almost universal for breakfasts, hence, I don't anticipate demand weakening outside of any normal seasonal variability.

Stay CALM And Carry On

The company generated a record net income of $198.6 million during the quarter, around $4.08 per share and up from a net income of $1.2 million in the year-ago period. However, common shares pulled back by around 5% in after-hours trading in spite of the results as investors fretted over a miss on consensus estimates. Analysts had expected net income to come in at around $4.24 per share and the $0.16 miss on consensus likely ignited fears that the commons had run up too strongly this year.

This miss also brought back the view of the outbreak coming to an end next year. The virulence of the previous 2015 avian influenza outbreak was limited to a few months with large-scale culling leading to positive cases falling to a few isolated cases a few months after the start. The current outbreak has lasted far longer but some analysts expect the situation to ease next year.

This has placed the company's valuation in view. Cal-Maine Foods currently trades on a price-to-forward GAAP earning ratio of 5.74x , around 72% lower than its peer group median. The dichotomy in valuation despite the bumper earnings and raised dividend profile likely reflects the lack of stay for the current earnings. These are temporary conditions that will eventually normalize as the company itself faces the material risk of heavily culling its own stocks on the detection of positive cases. The inherently transitory nature of current earnings makes it hard to recommend this as a long-term buy, but current owners would be best placed to keep riding the record dividends.

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