CALM - Cal-Maine Foods: The Egg-Ceptional Dividend Dip Can Be Reversed

2023-10-05 08:45:12 ET

Summary

• Cal-Maine Foods has had to slash its dividend materially following a collapse in net income as egg prices normalize.
• Revenue for its fiscal 2024 first quarter fell 30% year-over-year.
• Cal-Maine's substantial cash and investments, around 26% of its market cap, have fortified its balance sheet and improved its near-term prospects.

Cal-Maine Foods (CALM) last declared a quarterly cash dividend of $0.006 per share , a material sequential drop from $0.755 with the largest egg producer in the US employing a variable dividend policy equal to one-third of quarterly GAAP net income. CALM just reported dire fiscal 2024 first-quarter earnings, which ended September 2, 2023, as the North American egg market returns to normality following a generational windfall from the avian influenza outbreak last year. The US Department of Agriculture places the number of egg-laying hens lost at 43 million, with U.S. egg inventories around 29% lower at the end of calendar 2022. CALM has been one of the biggest beneficiaries of this, but the variable dividend reflects a return to normality.

To be clear, CALM is currently changing hands at a price to trailing 12-month sales multiple of 0.73x , lower than its 5-year average, with the market pricing in lower forward growth as egg prices stabilize. The average price of large white Grade A eggs sold by the dozen sits at $2.043 , down from $4.823 in January of this year. Critically, this is still above the upper range from 2016 to 2022, so there could be a further pull down of CALM's earnings if the downtrend continues. This forms the backdrop to the market's negative 7% reaction to CALM's first-quarter earnings. Forward growth will likely continue to be negative, with the outlook for dividends materially dimmed. Against this, the commons offer poor prospects for alpha against a higher for longer scenario for base interest rates.

Cal-Maine Foods' Revenue And Net Income Dip

CALM's first-quarter revenue came in at $459.34 million , down 30.2% over its year-ago quarter and a miss by $20.18 million on consensus estimates. The prices the company fetched for specialty eggs per dozen did increase by 8.4% to $2.278 from $2.101 a year ago, but these gains were fully offset by the decline of conventional egg selling prices. CALM conventional egg net average selling price per dozen was $1.241 during the first quarter, down from $2.368 in its year-ago comp. Further, specialty dozens at 33.5% of total dozens sold was a 120 basis point decline from 34.7% in the year-ago quarter. The impact of this was gross profit margin softening to 9.89% from 28.76% in the prior fourth quarter and from 33.04% in the year-ago period.

However, bulls would be right to flag the company's fortress balance sheet. There is zero debt held against $360.3 million in cash and equivalents and another $250 million in short-term investments. The company earned $7.35 million in interest income during the first quarter, up from $903,000 in its year-ago period, on the back of the marked rise in the Fed's funds rate and a cash balance that has risen for seven consecutive quarters. CALM's cash position has never been this high, with 26% of its market cap now accounted for by its $610 million liquidity position. This places its sales multiple under a new perspective because if you strip out the cash and investments, the ticker's enterprise value at $1.71 billion would mean its multiple against trailing 12-month sales drops to 0.58x.

Cal-Maine Foods Fiscal 2024 Outlook

CALM recorded a net income of $926,000, around $0.02 per share, down from $125.3 million in the year-ago quarter and a miss by $0.55 per share on consensus estimates. The rest of its fiscal 2024 will likely replicate this performance but holds the prospects of underperforming even more on the back of wider macroeconomic factors. For example, the October resumption of student loan repayments could see specialty dozens as a percent of total dozens continue to drop as consumers prioritize cheaper groceries. The interest income being earned forms a significant windfall for CALM, with an annualized interest income of $29.4 million set to be earned by the firm.

For some context, CALM paid out a $294,000 cash dividend, around $0.006 per share with interest income helping counter what was a $6.76 million operating loss during the first quarter. CALM should be looking at pursuing a reduction in selling, general, and administrative expenses to help drive a recovery of the dividend and its share price. The company could also look at bringing in a floor for its dividend payouts, backstopped by its large cash position. A minimum quarterly payout would be critical to keep dividend investors from fleeing and would not materially harm the prospects of the company. For example, a 12 cents per share quarterly dividend minimum, 20x the most recent declaration, would cost just $5.88 million per quarter. This would be just 0.96% of CALM's current cash and investment balance. Hence, whilst the future earnings are set to be poor, CALM's liquidity balance makes it hard to rate it as a sell.

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