After a significant surge in egg pricing, Cal-Maine Foods, Inc. (NASDAQ:CALM) experienced a remarkable bounce in its stock. However, recent data suggests that the stock may be overvalued. The company’s infrastructure and farm investments, along with strong egg demand, offer some positive aspects. Yet, egg pricing and feed costs indicate that the stock may be ahead of itself. While Cal-Maine Foods, Inc. has a solid balance sheet and a strong management record, it is better suited as a trading stock rather than a long-term investment.
In the latest fiscal quarter earnings report, the company missed both top and bottom line consensus estimates. Net sales dropped by 35% compared to the previous year, resulting in a decline in pricing. However, conventional egg volumes increased, while specialty egg volumes declined. CEO Sherman Miller stated that the company faced higher input costs and ongoing investments in biosecurity measures to mitigate the risk of avian influenza.
Strong restaurant and commercial demand for eggs has been offset by a normalization in pricing, which has led to lower revenues. Despite this, Cal-Maine Foods, Inc. sold 288.2 million dozen eggs in the recent quarter, reflecting a 1.3% increase from the previous year.
The company’s gross margin fell to 17.9% from 39.7% a year ago, primarily due to lower egg pricing. Sales of specialty eggs decreased by 0.8%, while conventional volumes rose by approximately 4%. Conventional egg prices also saw a significant decrease. On the positive side, feed costs have declined, which is promising for the company’s margins.
Although the company improved its operating loss compared to the previous quarter, it fell significantly short of its net income from a year ago. As a result, the dividend payout is likely lower than anticipated by most shareholders. Cal-Maine Foods, Inc. pays a variable dividend, meaning shareholders receive dividends when the company is net profitable on a cumulative basis.
Going forward, Cal-Maine Foods, Inc. is expected to face increased operating costs and slightly better egg prices. The company’s investments in cage-free facilities have shown positive results, with cage-free eggs accounting for approximately 30% of egg revenue. However, the volatility of egg pricing and potential external forces, such as weather patterns and global supply chain disruptions, continue to pose challenges for the company.
In conclusion, while Cal-Maine Foods, Inc. remains a major player in the egg market, its stock is subject to swings and may be overvalued. The recent fiscal quarter earnings report showed a decline in sales and earnings, largely due to lower egg pricing. Despite some positive factors such as strong egg demand and declining feed costs, we maintain a neutral stance on the stock’s near-term direction. Cal-Maine Foods, Inc. is better suited for trading rather than long-term investment, in our opinion.
