Cal-Maine: Is it Time to Chase this Stock Higher?

Key Points

• Cal-Maine Foods Inc. reports "eggcellent" quarter on record egg prices. 
• The company issued a dividend worth 3.6% this quarter. 
• Windfall profits are expected for the next two to three quarters. 

Chasing stock prices higher is rarely a sound investment strategy, but there are times when it can pay off, and Cal-Maine Foods Inc. NASDAQ: CALM  might be one of them. Dynamics within the egg-laying hen population have this company set up for windfall profits akin to the oil industry. The highly pathogenic avian influenza outbreak (HPAI) puts the hen population at historically low levels and is not expected to recover until early 2024 — if HPAI is under control.  

The problem isn't a widespread epidemic in the egg-laying population, but wild populations carrying the disease, which can pop up virtually anywhere. 

The good news for investors about Cal-Maine Foods stock is that its investments in biosecurity and industry-leading operations have, so far, prevented any outbreaks at its or partner facilities. This allows it to meet elevated demand in the face of rising prices, and that is where the opportunity lies. 

The company is making windfall profits that, combined with the stock price and dividend policy, make it a compelling value and yield proposition. The company reported $6.62 in third-quarter earnings, which gives it a valuation of 2.5x, and the dividend is robust. The company's policy is to pay out 30% of earnings for any quarter there is a profit, and profits are here. The new declaration is for $2.20 in quarterly payment, which is good for 3.6% or almost 15% annualized, assuming these profits continue. Including the first quarter, the company has paid nearly 6% for the fiscal year already. 

Cal-Maine Has Wow Quarter: Stock Shoots Higher 

Cal-Maine had what can only be called a "wow" quarter. The combination of increased demand and historic pricing led to revenue of $997.5 million, up almost 110% compared to last year. The revenue beat the consensus figure by 1,100 basis points, another "wow" comparison, and investors can expect this result for at least the next quarter or two. 

On a volume basis, dozens sold increased by 1.3%, led by a 9.4% increase in specialty eggs. On a pricing basis, the price of conventional eggs increased by 152% due to shortages within the industry, while specialty eggs increased by only 36%. 

The report held some bad news. Costs are rising in the form of feed and production, including increased security measures. Increased costs cut into the margin, but net income rose 10x compared to last year on the leverage of higher prices, driving the generally accepted accounting principles (GAAP) $6.62 in earnings, the dividend and the company's cash balance. Cash is up more than 3x to $645 million, driving a 30% increase in net assets. The company's liabilities are up primarily due to the dividend payment, but debt is low, and the balance sheet is a stronger fortress than last year. 

Institutional Activity Comes to a Simmer 

Cal-Maine tends to carry high institutional interest, but the interest ebbs and flows with profitability and dividend. The institutions have been buying the stock for several quarters due to the dividend return, and buying may increase now. The activity is mixed, with nearly as much selling as buying, but this is a rotation within the group as old holders take profits and new investors build positions. 

The chart is favorable for higher prices. Action over the last year suggests rotation within an increasingly bullish market and one set up to move higher. The third-quarter news has shares up more than 10% and confirms support at the long-term moving average. Assuming the market follows through on the signal, this stock could retest all-time highs soon and break out to a new high. The risk is that HPAI will cease and end the windfall profits. When that happens, this stock may hit the ceiling.