Cal-Maine Brings Calm To The Market

Cal-Maine’s Dividend Outlook Brightens

We weren't expecting great results from Cal-Maine NASDAQ: CALM in the calendar third quarter, fiscal first, and we were partly right. The company posted a loss as expected but it was much less than forecast which is good news for those expecting a dividend. Cal-Maine is a high-quality, if erratic, payer of dividends whose policy states that no payment can be made when there is a quarterly loss on the books or even until that loss is made up. That’s how they maintain the fortress balance sheet. What this means for investors is that a dividend is not expected to be issued this quarter or even the next but the fundamental picture is improving and a dividend could come early in 2022. Until then, The company will continue to invest in itself and grow.

Cal-Maine Beats The Consensus Estimate

Cal-Maine reported $331.70 million in net consolidated revenue for a gain of 13.3% over last year and 37.5% over 2019. The revenue beat the consensus by $13.3 million or 420 basis points on what we view as mixed fundamentals. The company says the volume of eggs delivered fell by 1.7% as stay-at-home tailwinds diminish and food-away-from-home business begins to pick up. That decline was offset by a $0.16 per dozen or 14.8% increase in the average selling price that we expect to persist into the current quarter at least. The average selling price is up on the combination of industry fundamentals and the company's ongoing shift to the specialty egg Market.

Specialty eggs include cage-free, hormone-free, and any other egg labeled other than “eggs” and those all come with a higher margin. Sales of specialty eggs accelerated 290 basis points to 28.9% of sales on a volume basis and accounted for 43% of the revenue. The bad news is that higher farm costs cut deeply into the gross margins on all types of eggs. The gross margin of 2.0% is down 370 basis points due to a  25% increase in farm costs that were driven by a 40% increase in feed cost. Because both farm and feed costs are being impacted by supply chain shortages and shipping constraints we think margin pressure will persist.  

Regardless, on the bottom line, the company reported -$0.37 to beat the consensus by $0.25 putting the net amount to be recovered before dividend payments at $0.46 per share. The company doesn't give any guidance but the analysts are expecting a consensus of $0.16 per share in earnings for the next quarter so it is very possible Cal-Maine will be back in a dividend-paying position in the second half of the fiscal year.

A Short-Covering Rally Is In Store For Cal-Maine

The Marketbeat.com data shows Cal-Maine is carrying a significantly high short interest that could and probably will help sustain higher share prices in the near to mid-term. At over 12% and more than 15 days-to-cover at the average trading volume, a move above the $37 level could spark a short squeeze as well.  Shares of Cal-Maine are trading just shy of that level in early premarket action but could easily cross it during the day. The stock appears to be forming a Head-and-Shoulders reversal that, if confirmed, could easily take the stock back up to the $37 level within a few days to a week. Longer-term, we are expecting the fundamental picture to shift into Cal-Maine’s favor in the calendar fourth quarter and drive profitability above expectation.